10-K
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-K
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(Mark One)
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þ
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended
December 31, 2008
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OR
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o
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the transition period
from to
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Commission file number
001-32868
DELEK US HOLDINGS,
INC.
(Exact name of registrant as
specified in its charter)
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Delaware
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52-2319066
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(State or other jurisdiction
of
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(I.R.S. employer
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incorporation or
organization)
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identification no.)
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7102 Commerce Way
Brentwood, Tennessee
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37027
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(Address of principal executive
offices)
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(Zip
code)
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Registrants telephone number, including area code
(615) 771-6701
Securities registered pursuant to Section 12(b) of the
Act:
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Title of Each Class
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Name of Each Exchange on Which Registered
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Common Stock, $.01 par value
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New York Stock Exchange
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Securities registered pursuant to Section 12(g) of the
Act:
None
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes o No þ
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Act. Yes o No þ
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past
90 days. Yes þ No o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
is not contained herein, and will not be contained, to the best
of registrants knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this
Form 10-K
or any amendments of this
Form 10-K. þ
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in
Rule 12b-2
of the Exchange Act. (Check one):
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Large
accelerated
filer o
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Accelerated
filer þ
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Non-accelerated
filer o
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Smaller
reporting
company o
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(Do not check if a smaller
reporting company)
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the
Act). Yes o No þ
The aggregate market value of the common stock held by
non-affiliates as of June 30, 2008 was approximately
$130,855,229, based upon the closing sale price of the
registrants common stock on the New York Stock Exchange on
that date. For purposes of this calculation only, all directors,
officers subject to Section 16(b) of the Securities
Exchange Act of 1934, and 10% stockholders are deemed to be
affiliates.
At February 24, 2009, there were 53,682,070 shares of
common stock, $.01 par value, outstanding.
Documents incorporated by reference
Portions of the registrants definitive Proxy Statement to
be delivered to stockholders in connection with the 2009 Annual
Meeting of Stockholders, which will be filed with the Securities
and Exchange Commission within 120 days after
December 31, 2008, are incorporated by reference into
Part III of this
Form 10-K.
Unless otherwise indicated or the context requires otherwise,
the terms Delek, we, our,
company and us are used in this report
to refer to Delek US Holdings, Inc. and its consolidated
subsidiaries. Statements in this Annual Report on
Form 10-K,
other than purely historical information, including statements
regarding our plans, strategies, objectives, beliefs,
expectations and intentions are forward looking statements.
These forward looking statements generally are identified by the
words may, will, should,
could, would, predicts,
intends, believes, expects,
plans, scheduled, goal,
anticipates, estimates and similar
expressions. Forward- looking statements are based on current
expectations and assumptions that are subject to risks and
uncertainties, including those discussed below and in
Item 1A, Risk Factors, which may cause actual results to
differ materially from the forward-looking statements. See also
Forward-Looking Statements included in Item 7,
Managements Discussion and Analysis of Financial Condition
and Results of Operations, of this Annual Report on
Form 10-K.
PART I
Company
Overview
We are a diversified energy business focused on petroleum
refining, wholesale sales of refined products and retail
marketing. Our business consists of three operating segments:
refining, marketing and retail. Our refining segment operates a
60,000 barrels per day (bpd) high conversion,
moderate complexity, independent refinery in Tyler, Texas. Our
marketing segment sells refined products on a wholesale basis in
west Texas through company-owned and third-party operated
terminals. Our retail segment markets gasoline, diesel, other
refined petroleum products and convenience merchandise through a
network of 482 company-operated retail fuel and convenience
stores located in Alabama, Arkansas, Georgia, Kentucky,
Louisiana, Mississippi, Tennessee and Virginia. Of these 482
locations, the 24 stores located in Virginia are currently
classified as held for sale for accounting purposes. For more
information, see Item 1 Business
Dispositions of Assets Held For Sale of this Annual Report on
Form 10-K.
We also own a 34.6% minority equity interest in Lion Oil
Company, a privately held Arkansas corporation, which owns and
operates a moderate conversion, independent refinery located in
El Dorado, Arkansas with a design crude distillation capacity of
75,000 barrels per day, and other pipeline and product
terminals.
Delek US Holdings, Inc. is the sole shareholder of MAPCO
Express, Inc. (Express), MAPCO Fleet, Inc.
(Fleet), Delek Refining, Inc.
(Refining), Delek Finance, Inc.
(Finance) and Delek Marketing & Supply,
Inc. (Marketing). We are a Delaware corporation
formed in connection with our acquisition in May 2001 of 198
retail fuel and convenience stores from a subsidiary of The
Williams Companies. Since then, we have completed several other
acquisitions of retail fuel and convenience stores. In April
2005, we expanded our scope of operations to include
complementary petroleum refining and wholesale and distribution
businesses by acquiring the Tyler refinery. We initiated
operations of our marketing segment in August 2006 with the
purchase of assets from Pride Companies LP and affiliates.
Delek and Express were incorporated during April 2001 in the
State of Delaware. Fleet, Refining, Finance, and Marketing were
incorporated in the State of Delaware during January 2004,
February 2005, April 2005 and June 2006, respectively.
We are a controlled company under the rules and regulations of
the New York Stock Exchange where our shares are traded under
the symbol DK. As of December 31, 2008,
approximately 73.4% of our outstanding shares were beneficially
owned by Delek Group Ltd. (Delek Group), a
conglomerate that is domiciled and publicly traded in Israel.
Delek Group has significant interests in fuel supply businesses
and is controlled indirectly by Mr. Itshak Sharon
(Tshuva).
The Tyler
Refinery Fire
On November 20, 2008, an explosion and fire occurred at our
60,000 bpd refinery in Tyler, Texas. Several individuals
were injured and two of our employees died. There are several
parallel investigations underway to determine the cause of the
event, including our own investigation and investigations by the
U.S. Department of Labors Occupational
Safety & Health Administration (OSHA) and
the U.S. Chemical Safety and Hazard
3
Investigation Board (CSB). We believe these
investigations will continue for the foreseeable future. We
cannot assure you as to the outcome of these investigations,
including possible civil penalties or other enforcement actions.
The explosion and fire caused damage to both our saturates gas
plant and naphtha hydrotreater and our operations at the
refinery have been suspended since the explosion. As a result of
the incident, we have been unable to provide our customer base
with the products they have normally expected from our
operation. Management currently anticipates that the refinery
will resume operations in May 2009.
Our refining segment carries insurance coverage with
$1.0 billion in combined limits to insure property damage
and business interruption, which we currently expect will cover
the bulk of the reconstruction and business interruption expense
during the transitional recovery period. It is currently
anticipated that the combined costs of reconstruction and
business interruption will be substantially less than the
combined limits.
Acquisitions
We have integrated our refinery acquisition, six convenience
store chain acquisitions and a pipeline and terminal acquisition
since our formation in May 2001. Our principal acquisitions
since inception are summarized below:
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Date
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Acquired Company/Assets
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Acquired From
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Approximate Purchase Price(1)
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May 2001
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MAPCO Express, Inc., with 198 retail fuel and convenience stores
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Williams Express, Inc.
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$162.5 million
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June 2001
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36 retail fuel and convenience stores in Virginia
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East Coast Oil Corporation
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$40.1 million
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February 2003
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Seven retail fuel and convenience stores
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Pilot Travel Centers
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$11.9 million
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April 2004
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Williamson Oil Co., Inc., with 89 retail fuel and convenience
stores in Alabama, and a wholesale fuel and merchandise operation
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Williamson Oil Co., Inc.
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$19.8 million, plus assumed debt of $28.6 million
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April 2005
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Refinery, pipeline and other refining, product terminal and
crude oil pipeline assets located in and around Tyler, Texas,
including physical inventories of crude oil, intermediaries and
light products (Tyler refinery)
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La Gloria Oil and Gas Company
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$68.1 million, including $25.9 million of prepaid crude
inventory and $38.4 million of assumed crude vendor liabilities
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December 2005
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21 retail fuel and convenience stores, a network of four
dealer-operated stores, four undeveloped lots and inventory in
the Nashville, Tennessee area
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BP Products North America, Inc.
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$35.5 million
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July 2006
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43 retail fuel and convenience stores located in Georgia and
Tennessee
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Fast Petroleum, Inc. and affiliates
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$50.0 million, including $0.1 million of cash acquired
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August 2006
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Refined petroleum product terminals, seven pipelines, storage
tanks, idle oil refinery equipment and rights under supply
contracts
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Pride Companies, L.P. and affiliates
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$55.1 million
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April 2007
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107 retail fuel and convenience stores located in northern
Georgia and southeastern Tennessee
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Calfee Company of Dalton, Inc. and affiliates
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$71.8 million, including $0.1 million of cash acquired
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(1) |
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Excludes transaction costs |
We expect to continue to review acquisition and internal growth
opportunities in the refining, marketing, retail fuel and
convenience store markets, as well as opportunities to acquire
assets related to distribution logistics, such as pipelines,
terminals and fuel storage facilities. Please see Item 1A,
Risk Factors, of this Annual Report on
Form 10-K
as well as our other filings with the SEC for a description of
the risks and uncertainties that are inherent in our acquisition
strategy.
4
Dispositions
of Assets Held for Sale
In 2008, management committed to a plan to sell the retail
segments 36 Virginia stores and proceeded with efforts to
locate buyers. However, until we obtained the necessary
amendments to our credit agreements, we were restricted from
that action. At the time the credit agreement asset sale
limitations were removed in December 2008, we had contracts to
sell 28 of the 36 Virginia properties. As of December 31,
2008, we closed on the sale of 12 of the properties and we
expect to close on the sales of the majority of the remaining
pending contracts in the first quarter of 2009. We continue our
efforts to sell the eight remaining properties that are
currently not under contract. We received proceeds from these
2008 sales, net of expenses, of $9.8 million in 2008. The
results from the Virginia stores have been reclassified to
discontinued operations and the assets and liabilities
associated with remaining stores are reflected as held for sale
for all periods presented herein.
Information
About Our Segments
We prepare segment information on the same basis that management
reviews financial information for operational decision making
purposes. Additional segment and financial information is
contained in our segment results included in Item 6,
Selected Financial Data, Item 7, Managements
Discussion and Analysis of Financial Condition and Results of
Operations, and in Note 13, Segment Data, of our
consolidated financial statements included in Item 8,
Financial Statements and Supplementary Data, of this Annual
Report on
Form 10-K.
Refining
Segment
We operate a high conversion, moderate complexity independent
refinery with a design crude distillation capacity of
60,000 bpd, along with an associated crude oil pipeline and
light products loading facilities. The refinery is located in
Tyler, Texas, and is the only supplier of a full range of
refined petroleum products within a radius of approximately
100 miles.
The Tyler refinery is situated on approximately 100 out of a
total of approximately 600 contiguous acres of land (excluding
pipelines) that we own in Tyler and adjacent areas. The Tyler
refinery includes a fluid catalytic cracking (FCC)
unit and a delayed coker, enabling us to produce approximately
95% light products, including primarily a full range of
gasoline, diesel, jet fuels, liquefied petroleum gas
(LPG) and natural gas liquids (NGLs) and
has a complexity of 9.5. For 2008, gasoline accounted for
approximately 54.4% and diesel and jet fuels accounted for
approximately 37.4% of the Tyler refinerys fiscal
production.
As the only full range product supplier in northeast Texas, our
location is a natural advantage over other suppliers. The
transportation cost of moving product into Tyler stands as a
barrier for competitors. We see this differential as a margin
enhancement. However, with production currently suspended as a
result of the incident at the Tyler refinery, our customers are
using other suppliers. When we resume operations, the return of
our customer base is not assured.
Fuel Customers. We have the advantage of being
able to deliver nearly all of our gasoline and diesel fuel
production into the local market using our terminal at the
refinery. Our customers generally have strong credit profiles
and include major oil companies, independent refiners and
marketers, jobbers, distributors, utility and transportation
companies, and independent retail fuel operators. Our
refinerys ten largest customers accounted for
$1,258.5 million, or 59.4%, of net sales for the refining
segment in 2008. Our customers include ExxonMobil, Valero
Marketing and Supply, Murphy Oil USA, Truman Arnold and Chevron,
among others. One customer, ExxonMobil, accounted for 13.4% or
of our net sales in 2008. Our product pipeline sales are
specific to Chevron and represent 5.2% of the refining
segments net sales. Additionally, we have a contract with
the U.S. government to supply jet fuel (JP8) to
various military facilities that expires in April 2009. The
U.S. government solicits competitive bids for this contract
annually. Sales under this contract totaled $110.0 million,
or 5.2%, of the refining segments 2008 net sales.
The Tyler refinery does not generally supply fuel to our retail
fuel and convenience stores, since it is not located in the same
geographic region as our stores.
Refinery Design and Production. The Tyler
refinery has a crude oil processing unit with a 60,000 bpd
atmospheric column and an 18,000 bpd vacuum tower. The
other major process units at the Tyler refinery include a
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20,200 bpd fluid catalytic cracking unit, a 6,500 bpd
delayed coking unit, a 21,000 bpd naphtha hydrotreating
unit, a 13,000 bpd gasoline hytrotreating unit, a
22,000 bpd distillate hydrotreating unit, a 17,500 bpd
continuous regeneration reforming unit, a 5,000 bpd
isomerization unit, and a sulfuric alkylation unit with a
capacity of 4,700 bpd.
The Tyler refinery is designed to mainly process light, sweet
crude oil, which is typically a higher quality, more expensive
crude oil than heavier and more sour crude oil. Our owned and
leased pipelines are connected to five crude oil pipeline
systems that allow us access to east Texas, west Texas and
foreign sweet crude oils. A small amount of local east Texas
crude oil is also delivered to the refinery by truck. The table
below sets forth information concerning crude oil received at
the Tyler refinery in 2008:
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Percentage of
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Source
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Crude Oil Received
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East Texas crude oil
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25.6
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%
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West Texas intermediate crude oil
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57.9
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%
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West Texas sour crude oil
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10.1
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%
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Foreign sweet and other domestic crude oil
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6.4
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%
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Upon delivery to the Tyler refinery, crude oil is sent to a
distillation unit, where complex hydrocarbon molecules are
separated into distinct boiling ranges. The processed crude oil
is then treated in specific units of the refinery, and the
resulting distilled and treated fuels are blended to create the
desired finished fuel products. A summary of our production
output for 2008 follows:
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Gasoline. Gasoline accounted for approximately
54.4% of our refinerys production. The refinery produces
two grades of conventional gasoline (premium 93
octane and regular 87 octane), as well as aviation
gasoline. Effective January 1, 2008, we began offering
E-10
products which contain 90% conventional fuel and 10% ethanol.
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Diesel/jet fuels. Diesel and jet fuel products
accounted for approximately 37.4% of our refinerys
production. Diesel and jet fuel products include military
specification JP8, commercial jet fuel, low sulfur diesel, and
ultra low sulfur diesel. Low sulfur diesel was replaced by ultra
low sulfur diesel beginning in September 2006.
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Petrochemicals. We produced small quantities
of propane, refinery grade propylene and butanes.
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Other products. We produced small quantities
of other products, including anode grade coke, slurry oil,
sulfur and other blendstocks.
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6
The table below sets forth information concerning the historical
throughput and production at the Tyler refinery for the last
three fiscal years.
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Year Ended
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Year Ended
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Year Ended
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December 31,
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December 31,
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December 31,
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2008(1)
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2007
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2006
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Bpd
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%
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Bpd
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%
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Bpd
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%
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Refinery throughput (average barrels per day):
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Crude:
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Light
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46,468
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81.6
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%
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49,711
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88.5
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%
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55,998
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96.3
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%
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Sour
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5,215
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9.2
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4,149
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7.4
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Total crude
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51,683
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90.8
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53,860
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95.9
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55,998
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96.3
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Other blendstocks(2)
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5,239
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9.2
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2,303
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4.1
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2,130
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3.7
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Total refinery throughput
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56,922
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100.0
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%
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56,163
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100.0
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%
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58,128
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100.0
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%
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Products produced (average barrels per day):
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Gasoline(3)
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30,346
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54.4
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%
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29,660
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54.3
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%
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30,163
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53.3
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%
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Diesel/jet
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20,857
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37.4
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20,010
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36.6
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21,816
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38.6
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Petrochemicals, LPG, NGLs
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1,963
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3.5
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2,142
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3.9
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2,280
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4.0
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Other
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2,607
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4.7
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2,848
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5.2
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2,324
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4.1
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Total production
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55,773
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100.0
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%
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54,660
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100.0
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%
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56,583
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100.0
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%
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(1) |
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The refinery has not operated since the November 20, 2008
explosion and fire. This information has been calculated based
on the 324 days that the refinery was operational in 2008. |
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(2) |
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Includes denatured ethanol. |
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(3) |
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Includes
E-10 product. |
Profitability Improvements. The fourth quarter
2008 explosion and fire at the Tyler refinery resulted in a
suspension in production which continues to the date of this
filing. During this period of refinery shutdown, we have moved
forward with major unit turnarounds and the Crude Optimization
capital projects which were previously slated to be completed in
late 2009. We now expect portions of the Crude Optimization
projects to be completed in the first half of 2009. The Deep Cut
and Coker Valve portions of this project will allow the refinery
to process what has generally been a lower cost (heavier, more
sour) crude slate, as well as reduce some current operational
bottlenecks. In addition, we expect the fractionation section
modifications for the FCC Reactor Revamp portion of this project
to be completed in the first half of 2009.
We expect the remaining portions of these projects will be
completed by the first half of 2010. These remaining projects
include the addition of a NaSH Unit and a second Amine Unit to
allow the refinery to take full advantage of the designed sour
crude slate, and the installation of the new FCC Reactor to
allow the full utilization of the deep cut
capability of the Vacuum Unit.
Though not currently anticipated, we may experience increases in
the cost of or a delay in the receipt of equipment required to
complete these projects, as is a possibility with any capital
project. Additionally, the scope of the work, cost of qualified
employees and contractor labor expense related to the
installation of equipment are all at risk of increases.
In 2008, the refinery completed the installation of a Gasoline
Hydrotreater Unit. The Gasoline Hydrotreater allowed the
refinery to meet the Tier II gasoline specifications for
sulfur in gasoline and eliminated the previous constraints on
the sulfur content in crude selection because of the crude
slates impact on the sulfur content of the gasoline pool.
In 2007, the refinery completed a revamp of the Kerosene Merox
Unit to significantly increase its capacity when processing
crude slates that contain increased quantities of naphthenic
acid components in the kerosene boiling range. This project
effectively removed constraints on the allowable quantity of WTI
that could be included
7
in the crude slate, thereby providing additional flexibility to
potentially gain margin on crude selections and to increase
total distillate production.
During the third quarter of 2006, two significant capital
projects were completed that allowed us to produce 100% of our
diesel pool as ultra low sulfur diesel and provided improved and
more reliable sulfur handling capability at the refinery. These
projects included the expansion and modification of the Diesel
Hydrotreater Unit and the installation of a new 35 long ton per
day Sulfur Recovery Unit and Tail Gas Treating Unit.
Storage Capacity. Storage capacity at the
Tyler refinery, including tanks along our pipeline, totals
approximately 2.5 million barrels, consisting of
approximately 1.1 million barrels of crude oil storage and
1.4 million barrels of refined and intermediate product
storage.
Supply and Distribution. Roughly one quarter
of the crude oil purchased for the Tyler refinery is east Texas
crude oil. Most of the east Texas crude oil processed in our
refinery is delivered to us by truck or through our
company-owned pipeline and a leased pipeline from Nettleton
Station in Longview, Texas. This represents an inherent cost
advantage due to our ability to purchase crude oil on its way to
the market, as opposed to purchasing from a market or trade
location. Crude oil is purchased during the trading month and
priced during the calendar month to achieve the refinery crack
spread of the day. The ability of our refinery to receive both
domestic and foreign barrels affords us the opportunity to
replace barrels with financially advantaged alternatives on
short notice.
Our ability to access West Texas Intermediate (WTI)
or foreign sweet crude oil, when available, at competitive
prices has been a significant competitive supply cost advantage
at the refinery. These alternate supply sources allow us to
optimize the refinery operation and utilization while also
allowing us to more favorably negotiate the cost and quality of
the local east Texas crude oil we purchase.
The Delek East Texas Pipeline System, which we own, consists of
approximately 65 miles of six-inch crude oil lines that
transport crude oil to the Tyler refinery. We currently operate
the main trunk line, and the following pump stations and
terminals that are also owned by us:
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Atlas Tank Farm: One 150,000 barrel tank
and one 300,000 barrel tank
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Nettleton Station: Five 55,000 barrel
tanks
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Bradford Station: One 54,000 barrel tank
and one 9,000 barrel tank
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ARP Station: Two 55,000 barrel tanks
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Much of our pipeline system runs across leased land or
rights-of-way.
The vast majority of our transportation fuels and other products
are sold by truck directly from the refinery. We operate a nine
lane transportation fuels truck rack with a wide range of
additive options, including proprietary packages dedicated for
use by our major oil company customers. Capabilities at our rack
include the ability to simultaneously blend finished components
prior to loading trucks. LPG, NGLs and clarified slurry oil are
sold by truck from dedicated loading facilities at the refinery.
Effective January 1, 2008, we also began selling
E-10
products at our truck rack. We also have a pipeline connection
for the sale of propane into a facility owned by Texas Eastman.
We sell petroleum coke primarily by rail from the refinery, with
occasional truck loading for specialty or excess product. All of
our ethanol is currently transported to the refinery by truck.
Ethanol tank capacity is currently limited to 9,000 barrels.
The remainder of our transportation fuels are sold by pipeline
to a single, pipeline-connected terminal owned by Chevron. We
transport these products on TEPPCO pipeline to a point of
interconnection to a Chevron-owned pipeline terminating in Big
Sandy, Texas.
Competition. The refining industry is highly
competitive and includes fully integrated national and
multinational oil companies engaged in many segments of the
petroleum business, including exploration, production,
transportation, refining, marketing and retail fuel and
convenience stores. Our principal competitors are Texas Gulf
Coast refiners, product terminal operators in the east Texas
region and Calumet Lubricants in Shreveport, Louisiana. The
principal competitive factors affecting our refinery operations
are crude oil and other feedstock costs, refinery product
margins, refinery efficiency, refinery product mix, and
distribution and transportation costs.
8
Certain of our competitors operate refineries that are larger
and more complex and in different geographical regions than
ours, and, as a result, could have lower per barrel costs,
higher margins per barrel and throughput or utilization rates
which are better than us. We have no crude oil reserves and are
not engaged in exploration or production. We believe, however,
our geographic location provides an inherent advantage because
our competitors have an inherent transportation cost. Our
location allows for a realized margin that is favorable in
comparison to the reported U.S. Gulf Coast 5-3-2 crack
spread.
Marketing
Segment
The marketing segment sells refined products on a wholesale
basis in west Texas through company-owned and third party
operated terminals. In order to achieve the goals of this
business, we intend to:
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develop and leverage our existing marketing and distribution
capabilities and experience using our assets;
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utilize our supply contracts in a more favorable manner;
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develop exchange opportunities between our segments; and
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expand our base of operations through acquisitions.
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Our marketing segment generates net sales through five
integrated activities:
i. transportation of petroleum products through pipelines
and company-owned truck loading terminals in Abilene and
San Angelo, Texas;
ii. direct sales of petroleum products to third parties
through truck racks in San Angelo, Abilene, Aledo, Odessa
and Big Springs, Texas and other terminals throughout the
Magellan Orion pipeline system;
iii. supplying product to exchange partners at the Abilene,
San Angelo and Aledo, Texas terminals;
iv. marketing services provided to our Tyler refinery for
both wholesale marketing and contract sales;
v. supplying ethanol to Express for blending with
conventional gasoline using our newly constructed
30,000 barrel tanks located at a third-party owned terminal
in Nashville, Tennessee; and
vi. a margin-sharing arrangement with our Tyler refinery of
50% of wholesale margins above a contractually defined threshold.
Petroleum Product Marketing Terminals. The
marketing segment markets its products through three
company-owned terminals in San Angelo, Abilene and Tyler,
Texas and third-party terminal operations in Aledo, Odessa and
Big Springs, Texas. The San Angelo terminal began
operations in 1991 and has operated continuously. The Abilene
terminal began operations in the 1950s and has undergone
routine upgrading. At each terminal, products are loaded on two
loading lanes each having four bottom-loading arms. The loading
racks are fully automated and unmanned during the night. The
Tyler terminal was built in the 1970s and was most
recently expanded in 1994. It is currently operated by our
refining segment, includes nine loading lanes and is fully
automated and unmanned at night. We have in excess of
1,000,000 barrels of combined refined product storage tank
capacity at Tye, Texas Station (a Magellan Pipeline Company,
L.P. (Magellan Pipeline) tie-in location) and our
terminals in Abilene and San Angelo.
Pipelines. We own seven product pipelines of
approximately 114 miles between our refined product
terminals in Abilene and San Angelo, Texas, which includes
a line connecting our facility to Dyess Air Force Base. These
refined product pipelines include:
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an eight-inch pipeline from a Magellan Pipeline custody transfer
point at Tye Station to the Abilene terminal;
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a 13.5 mile, four-inch pipeline from the Abilene terminal
to the Magellan Pipeline tie-in;
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a 76.5 mile, six-inch pipeline system from the Magellan
Pipeline tie-in to San Angelo; and
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three other local product pipelines.
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9
Supply Agreements. Substantially all of our
petroleum products are purchased from two suppliers, Northville
Product Services, L.P. (Northville) and Magellan
Asset Services, L.P. (Magellan), under separate
supply contracts. Under the terms of the Northville contract, we
can purchase up to 20,350 bpd of petroleum products for the
Abilene terminal for sales and exchange at Abilene and
San Angelo. This agreement runs through December 31,
2017.
Additionally, we can purchase up to an additional 7,000 bpd
of refined products under the terms of the contract with
Magellan. This agreement expires on December 14, 2015. The
primary purpose of this second contract is to supply products at
terminals in Aledo and Odessa, Texas.
Customers. We have various types of customers
including major oil companies such as ExxonMobil, independent
refiners and marketers such as Murphy Oil, jobbers,
distributors, utility and transportation companies, and
independent retail fuel operators. In general, marketing
customers typically come from within a
100-mile
radius of our terminal operations. Our customers include, among
others, Murphy Oil, ExxonMobil, and Susser Petroleum. One
customer accounted for more than 10% of our marketing segment
net sales and the top ten customers accounted for just over half
of the marketing segment net sales in 2008. Pursuant to an
arms length services agreement, our marketing segment also
provides marketing and sales services for customers of the Tyler
refinery. In return for these services to customers of the Tyler
refinery, the marketing segment receives a service fee based on
the number of gallons sold from the refining segment plus a
sharing of marketing margin above predetermined thresholds. Net
fees received from the refining segment under this arrangement
were $13.8 million and $14.7 million in 2008 and 2007,
respectively, and were eliminated in consolidation.
Competition. Our company-owned refined product
terminals compete with other independent terminal operators as
well as integrated oil companies on the basis of terminal
location, price, versatility and services provided. The costs
associated with transporting products from a loading terminal to
end users limit the geographic size of the market that can be
served economically by any terminal. The two key markets in west
Texas that we serve from our company-owned facilities are
Abilene and San Angelo, Texas. We have direct competition
from an independent refinery that markets through another
terminal in the Abilene market. There are no competitive fuel
loading terminals within approximately 90 miles of our
San Angelo terminal.
Retail
Segment
As of December 31, 2008, we operated 482 retail fuel and
convenience stores, which are located in Alabama, Arkansas,
Georgia, Kentucky, Louisiana, Mississippi, Tennessee and
Virginia, primarily under the MAPCO
Express®,
MAPCO
Mart®,
Discount Food
Marttm,
Fast Food and
Fueltm,
East
Coast®
and Favorite
Markets®
brands. Of these 482 locations, the 24 stores located in
Virginia are currently classified as held for sale for
accounting purposes. For more information, see
Item 1 Business Dispositions of
Assets Held for Sale of this Annual Report on
Form 10-K.
In July 2006, we purchased 43 stores from Fast Petroleum, Inc.
and affiliates that strengthened our presence in key markets
located in southeastern Tennessee and northern Georgia and we
also re-imaged all stores purchased from BP Products North
America, Inc. (BP) in December 2005. In April 2007,
we purchased 107 stores from Calfee Company of Dalton, Inc. and
affiliates. This purchase further solidified our presence in the
southeastern Tennessee and northern Georgia markets. In 2007, we
completed three raze and rebuilds and retrofitted
one existing store using our next generation, MAPCO Mart
concept. The MAPCO Mart store with
GrilleMarx®
is designed to
offer premium amenities and products, such as a proprietary
made-to-order food program with bi-lingual touch-screen order
machines, seating, expanded coffee and hot drink bars, an
expanded cold and frozen drink area where customers can
customize their drink flavors, a walk-in beer cave and an
expanded import and micro brew beer section. Historically, the
majority of our raze and rebuilds and retrofits
occurred at stores in our Nashville market. However, two of the
three raze and rebuilds completed in 2007 were in
Alabama using our MAPCO Mart brand. In 2008, we continued the
expansion of our MAPCO Mart concept with one store built from
the ground up, two additional raze and rebuilds and
51 re-image/retrofit sites. One raze and rebuild in
2008 was introduced to our Memphis market and another was
introduced to our Chattanooga market. We plan to continue our
raze and rebuild program in these and other of our
markets and will utilize the upscale imagery of these next
generation stores to continue re-imaging existing locations in
2009.
10
We believe that we have established strong brand recognition and
market presence in the major retail markets in which we operate.
Approximately 78% of our stores are concentrated in Tennessee
and Alabama. In terms of number of retail fuel and convenience
stores, we rank in the top-five in the major markets of
Nashville, Chattanooga, Memphis and northern Alabama.
Our stores are positioned in high traffic areas, we operate a
high concentration of sites in similar geographic regions to
promote operational efficiencies and we employ a localized
marketing strategy that focuses on the demographics surrounding
each store and customizing product mix and promotional
strategies to meet the needs of customers in those demographics.
Our business model also incorporates a strong focus on
controlling operating expenses and loss prevention, which
continues to be an important element in the successful
development of our retail segment.
Company-Operated Stores. Of our sites,
approximately 60% are open 24 hours per day and the
remaining sites are open at least 16 hours per day. Our
average store size is approximately 2,360 square feet with
approximately 69% of our stores being 2,000 or more square feet.
Our retail fuel and convenience stores typically offer tobacco
products and immediately consumable items such as non-alcoholic
beverages, beer and a large variety of snacks and prepackaged
items. A significant number of the sites also offer state
sanctioned lottery games, ATM services and money orders. Several
of our stores include well recognized national branded quick
service food chains such as
Subway®
and Quiznos. Since 2005, we have also been developing an
in-house, quick service food offering under the
GrilleMarx®
brand. We currently have 14 stores that offer this service. In
2006, we introduced our own
MAPCO®
private label products in the majority of our locations for soft
drink, water and automotive categories which provide points of
differentiation and enhanced margins. In 2007, we introduced
candy and energy drinks under our
MAPCO®
private label program. We intend to continue to introduce new
private label product offerings using our
MAPCO®
brand. All but three of our locations offer both retail fuel and
convenience stores. The majority of our locations have four to
five multi-pump fuel dispensers with credit card readers.
Virtually all of our company-operated locations have a canopy to
protect self-service customers from rain and to provide street
appeal by creating a modern, well-lit and safe environment.
Effective January 1, 2008, we initiated blending of ethanol
in our finished gasoline products, allowing customers access to
E-10
products.
Fuel Operations. For 2008, 2007 and 2006, our
net fuel sales from continuing operations were 78.8%, 75.9%, and
74.9%, respectively, of total net sales from the continuing
operations for our retail segment. The following table
highlights certain information regarding our continuing fuel
operations for these years:
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Year Ended December 31,
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2008(1)
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2007(1)
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2006(1)
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Number of stores (end of period)
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458
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461
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358
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Average number of stores (during period)
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458
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434
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333
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Retail fuel sales (thousands of gallons)
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407,597
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412,052
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329,311
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Average retail gallons per average number of stores (thousands
of gallons)
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891
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950
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989
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Retail fuel margin (cents per gallon)
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$
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0.197
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$
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0.147
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$
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0.147
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(1) |
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All numbers in this table reflect only continuing operations. |
We currently operate a fleet of delivery trucks that deliver
approximately half of the fuel sold at our retail fuel and
convenience stores. We believe that the operation of a
proprietary truck fleet enables the company to reduce fuel
delivery expenses while enhancing service to our locations.
We purchased approximately 29% of the fuel sold at our
proprietary brand retail fuel and convenience stores in 2008
from Valero Marketing and Supply under a contract that extends
through the second quarter of 2009. The remainder of our
proprietary brand fuel is purchased from a variety of
independent fuel distributors and other suppliers. We purchase
fuel for our branded locations under contracts with BP,
ExxonMobil, Shell, Conoco, Marathon and Chevron. The price of
fuel purchased is generally based on contracted differentials to
local and regional price benchmarks. The initial terms of our
supply agreements range from one year to 15 years and
11
generally contain minimum monthly or annual purchase
requirements. To date, we have met most of our purchase
commitments under these contracts. We recorded liabilities for
failure to purchase required contractual volume minimums of
$0.3 million in 2008 and $0.2 million in both 2007 and
2006.
Merchandise Operations. For 2008, 2007 and
2006, our merchandise sales were 21.2%, 24.1%, and 25.1%,
respectively, of total net sales for our retail segment. The
following table highlights certain information regarding our
continuing merchandise operations for these years:
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Year Ended December 31,
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2008(1)
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2007(1)
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2006(1)
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Comparable store merchandise sales change (year over year)
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(6.7
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)%
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1.4
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%
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3.6
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%
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Merchandise margin
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31.5
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%
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31.6
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%
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30.3
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%
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Merchandise profit as a percentage of total margin
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58.7
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%
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65.7
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%
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64.5
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%
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(1) |
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All numbers in this table reflect only continuing operations. |
We purchased approximately 56% of our general merchandise,
including most tobacco products and grocery items, for 2008 from
a single wholesale grocer, Core-Mark International, Inc.
(Core-Mark). We entered into a contract with
Core-Mark that expires at the end of 2010, but may be renewed at
our option through the end of 2013. Our other major suppliers
include
Coca-Cola®,
Pepsi-Cola®
and Frito
Lay®.
Technology and Store Automation. We continue
to invest in our technological infrastructure to enable us to
better address the expectations of our customers and improve our
operating efficiencies and inventory management. In 2008, we
completed the implementation of a project for scanning in
merchandise as it is received at our company-operated stores and
began a perpetual item level inventory project that we expect to
have in all stores by the end of 2009.
In 2007, we selected
FuelQueststm
Fuel Management System to enhance our management of fuel
inventory and fuel purchasing. We implemented this software in
the fourth quarter of 2008 and expect that it will provide
efficiencies across the multiple processes we currently use.
Most of our stores are connected to a high speed data network
and provide near real-time information to our supply chain
management, inventory management and security systems. We
believe that our systems provide many of the most desirable
features commercially available today in the information
software market, while providing us more rapid access to data,
customized reports and greater ease of use. Our information
technology systems help us manage our inventory, optimize our
marketing strategy and reduce cash and merchandise shortages.
Our information technology systems allow us to improve our
profitability and strengthen operating and financial performance
in multiple ways, including by:
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tracking sales of complementary products; for example,
determining the impact of fuel price movements on in-store sales
or tracking the impact of a beer promotion on snack sales;
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pricing fuel at individual stores on a daily basis, taking into
account competitors prices, competitors historical
behavior, daily changes in cost and the impact of pricing on
in-store merchandise sales;
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allowing us to determine on a daily basis negative sales trends;
for example, merchandise categories that are below budget or
below the prior periods results; and
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integrating our security video with our point of sales
transaction log in a searchable database that allows us to
search for footage related to specific transactions enabling the
identification of potentially fraudulent transactions and
providing examples through which to train our employees.
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Dealer-Operated Stores. Our retail segment
also includes a wholesale fuel distribution network that
supplies 55 dealer-operated retail locations. In 2008, our
dealer net sales represented approximately 5.5% of net sales for
our retail segment. Our business with dealers includes a variety
of contractual arrangements in which we pay a commission to the
dealer based on profits from the fuel sales, contractual
arrangements in which we supply fuel and invoice the dealer for
the cost of fuel plus an agreed upon margin and non-contractual
arrangements in which dealers order fuel from us at their
discretion.
12
Competition. The retail fuel and convenience
store business is highly competitive. We compete on a
store-by-store
basis with other independent convenience store chains,
independent owner-operators, major petroleum companies,
supermarkets, drug stores, discount stores, club stores, mass
merchants, fast food operations and other retail outlets. Major
competitive factors affecting us include location, ease of
access, pricing, timely deliveries, product and service
selections, customer service, fuel brands, store appearance,
cleanliness and safety. We believe we are able to effectively
compete in the markets in which we operate because our market
concentration in most of our markets allows us to gain better
vendor support. Our retail segment strategy continues to center
on operating a high concentration of sites in a similar
geographic region to promote operational efficiencies. In
addition, we use proprietary information technology that allows
us to effectively manage our fuel sales and margin.
Minority
Investment
We also own a 34.6% minority interest in Lion Oil Company
(Lion Oil), a privately held Arkansas corporation,
which owns and operates a moderate conversion, independent
refinery with a design crude distillation capacity of
75,000 barrels per day, three crude oil pipelines and
refined product terminals in Memphis and Nashville, Tennessee.
The refinery is located in El Dorado, Arkansas. The El Dorado
refinery has the ability to produce and sell all consumer grades
of gasoline, distillates, propanes, solvents, high sulfur
diesel, low sulfur diesel, dyed low sulfur diesel, asphalt and
protective coatings, specialty asphalt products and liquefied
petroleum gas. Effective October 1, 2008, we are accounting
for this interest using the cost method. See Note 7 of the
Consolidated Financial Statements contained in Item 8,
Financial Statements and Supplementary Data of this Annual
Report on
Form 10-K
for further discussion.
Governmental
Regulation and Environmental Matters
We are subject to various federal, state and local environmental
laws. These laws raise potential exposure to future claims and
lawsuits involving environmental matters which could include
soil and water contamination, air pollution, personal injury and
property damage allegedly caused by substances which we
manufactured, handled, used, released or disposed. While it is
often difficult to quantify future environmental-related
expenditures, Delek anticipates that continuing capital
investments will be required over the next several years to
comply with existing regulations.
Based upon environmental evaluations performed internally and by
third parties subsequent to our purchase of the Tyler refinery,
we have recorded a liability of approximately $7.7 million
as of December 31, 2008 relative to the probable estimated
costs of remediating or otherwise addressing certain
environmental issues of a non-capital nature which were assumed
in connection with the refinery acquisition. This liability
includes estimated costs for on-going investigation and
remediation efforts for known contaminations of soil and
groundwater which were already being performed by the former
owner, as well as estimated costs for additional issues which
have been identified subsequent to the purchase. Approximately
$2.5 million of the liability is expected to be expended
over the next 12 months with the remaining balance of
$5.2 million expendable by 2022.
In late 2004, the prior refinery owner began discussions with
the U.S. Environmental Protection Agency (EPA)
Region 6 and the United States Department of Justice
(DOJ) regarding certain air quality requirements at
the refinery. The prior refinery owner expected to settle the
matter with the EPA and the DOJ by the end of 2005, however, the
EPA did not present a consent decree and no discussions occurred
in 2006. Nonetheless, Delek completed certain capital projects
at the refinery that the EPA indicated would likely be addressed
in a consent decree. These projects include a new electrical
substation to increase operational reliability and additional
sulfur removal capacity to address upsets at the refinery.
In June 2007, EPA Region 6 and DOJ resumed negotiations and
presented the former owner and Delek with the initial draft of
the consent decree in August 2007. The companies provided
comments at that time and received a revised draft consent
decree in April 2008. The revised draft consent decree addresses
capital projects that have either been completed or will not
have a material adverse effect upon our future financial
results. In addition, the proposed consent decree requires
certain on-going operational changes that will increase future
operating expenses at the refinery. At this point in time, we
believe any such costs will not have a material adverse effect
upon our business, financial condition or operations. We have
been advised by the EPA and the DOJ that they plan to
13
simultaneously file a complaint and lodge a consent decree by
March 31, 2009 in the United States District Court for the
Eastern District of Texas, naming Refining as defendant. Under
the draft consent decree, Refining would be liable for
injunctive relief and payment of any stipulated penalties for
future violations.
In October 2007, the Texas Commission on Environmental Quality
(TCEQ) approved an Agreed Order in which the Tyler
refinery resolved alleged violations of air rules dating back to
the acquisition of the refinery. The Agreed Order required the
refinery to pay a penalty and fund a Supplemental Environmental
Project for which we had previously reserved adequate amounts.
In addition, the refinery was required to implement certain
corrective measures, which the company has completed, with one
exception. Delek has advised the TCEQ of the exception, which we
believe will not result in a material adverse effect on our
business, financial condition or results of operations.
Contemporaneous with the refinery purchase, Delek became a party
to a Waiver and Compliance Plan with the EPA that extended the
implementation deadline for low sulfur gasoline from
January 1, 2006 to May 2008, based on the capital
investment option we chose. In return for the extension, we
agreed to produce 95% of the diesel fuel at the refinery with a
sulfur content of 15 ppm or less by June 1, 2006
through the remainder of the term of the Waiver. During the
first quarter of 2008, it became apparent to us that the
construction of our gasoline hydrotreater would not be completed
by the original deadline of May 31, 2008 due to the
continuing shortage of skilled labor and ongoing delays in the
receipt of equipment. We began discussions with the EPA
regarding this potential delay in completing the gasoline
hydrotreater and agreed to an extension to certain provisions of
the Waiver that allowed us to exceed the 80 ppm per-gallon
sulfur maximum for up to two months past the original
May 31, 2008 compliance date. Construction and
commissioning of the gasoline hydrotreater was completed in June
2008 with all gasoline meeting low sulfur specifications by the
end of June.
The EPA has issued final rules for gasoline formulation that
will require further reductions in benzene content by 2011. We
are in the process of identifying and evaluating options for
complying with this requirement.
The Energy Policy Act of 2005 requires increasing amounts of
renewable fuel be incorporated into the gasoline pool through
2012. Under final rules implementing this Act (the
Renewable Fuel Standard), the Tyler refinery is
classified as a small refinery exempt from renewable fuel
standards through 2010. The Energy Independence and Security Act
of 2007 increased the amounts of renewable fuel required by the
Energy Policy Act of 2005. The EPA has not yet promulgated
implementing rules for the 2007 Act so it is not yet possible to
determine what the Tyler refinery compliance requirement will
be. Although temporarily exempt from this rule, the Tyler
refinery began supplying an
E-10
gasoline-ethanol blend in January 2008.
The Comprehensive Environmental Response, Compensation and
Liability Act (CERCLA), also known as
Superfund, imposes liability, without regard to
fault or the legality of the original conduct, on certain
classes of persons who are considered to be responsible for the
release of a hazardous substance into the
environment. These persons include the owner or operator of the
disposal site or sites where the release occurred and companies
that disposed or arranged for the disposal of the hazardous
substances. Under CERCLA, such persons may be subject to joint
and several liabilities for the costs of cleaning up the
hazardous substances that have been released into the
environment, for damages to natural resources and for the costs
of certain health studies. It is not uncommon for neighboring
landowners and other third parties to file claims for personal
injury and property damage allegedly caused by hazardous
substances or other pollutants released into the environment.
Analogous state laws impose similar responsibilities and
liabilities on responsible parties. In the course of the
refinerys ordinary operations, waste is generated, some of
which falls within the statutory definition of a hazardous
substance and some of which may have been disposed of at
sites that may require cleanup under Superfund. At this time, we
have not been named a party at any Superfund sites and under the
terms of the refinery purchase agreement, we did not assume any
liability for wastes disposed of prior to our ownership.
During 2007, the Department of Homeland Security
(DHS) promulgated Chemical Facility Anti-Terrorism
Standards to regulate the security of high risk
chemical facilities. In compliance with this rule, we submitted
certain required information concerning our Tyler refinery and
Abilene and San Angelo terminals to the DHS. We do not
believe the outcome of any requirements imposed by DHS will have
a material effect on our business.
14
In June 2007, OSHA announced it was implementing a National
Emphasis Program addressing workplace hazards at petroleum
refineries. Under this program, OSHA expects to conduct
inspections of process safety management programs over the next
two years at approximately 80 refineries nationwide. On
February 19, 2008, OSHA commenced an inspection at our
Tyler, Texas refinery. In August, OSHA concluded its inspection
and issued citations assessing an aggregate penalty of less than
$0.1 million. We are contesting the citations and do not
believe that the outcome will have a material effect on our
business.
Following the fire and explosion on November 20, 2008, OSHA
and the CSB initiated separate investigations of the incident at
the refinery. Those investigations are on-going and we believe
they will continue into the foreseeable futures.
Employees
As of December 31, 2008, we had 3,692 employees, of
which 256 were employed in our refining segment, 16 were
employed in our marketing segment and 3,420 were employed either
full or part-time in our retail segment. As of December 31,
2008, 149 operations and maintenance hourly employees and 40
truck drivers at the refinery were represented by the United
Steel, Paper and Forestry, Rubber, Manufacturing, Energy, Allied
Industrial and Service Workers International Union and its Local
202 and were covered by collective bargaining agreements which
run through March 31, 2009. None of our employees in our
marketing or retail segments or in our corporate office are
represented by a union. We consider our relations with our
employees to be satisfactory.
Trade
Names, Service Marks and Trademarks
We regard our intellectual property as being an important factor
in the marketing of goods and services in our retail segment. We
own, have registered or applied for registration of a variety of
trade names, service marks and trademarks for use in our
business. We own the following trademark registrations issued by
the United States Patent and Trademark Office:
MAPCO®,
MAPCO
MART®,
MAPCO EXPRESS &
Design®,
EAST
COAST®,
GRILLE
MARX®
CAFÉ EXPRESS FINEST COFFEE IN TOWN MAPCO &
Design®,
GUARANTEED RIGHT! MAPCO EXPRESS &
Design®,
FAST FOOD AND
FUELtm, FLEET
ADVANTAGE®
and DELTA
EXPRESS®.
While we do not already have and have not applied for a
federally registered trademark for DISCOUNT FOOD
MARTtm,
we do claim common law trademark rights in this name. Our right
to use the MAPCO name is limited to the retail fuel
and convenience store industry. We are not otherwise aware of
any facts which would negatively impact our continuing use of
any of our trade names, service marks or trademarks.
Available
Information
Our internet website address is
http://www.DelekUS.com.
Information contained on our website is not part of this Annual
Report on
Form 10-K.
Our annual reports on
Form 10-K,
quarterly reports on
Form 10-Q
and current reports on
Form 8-K
filed with (or furnished to) the Securities and Exchange
Commission (SEC) are available on our internet
website (in the Investor Relations section), free of
charge, as soon as reasonably practicable after we file or
furnish such material to the SEC. We also post our corporate
governance guidelines, code of business conduct and ethics and
the charters of our board of directors committees in the
same website location. Our governance documents are available in
print to any stockholder that makes a written request to
Secretary, Delek US Holdings, Inc., 7102 Commerce Way,
Brentwood, TN 37027. In accordance with Section 303A.12(a)
of the New York Stock Exchange Listed Company Manual, we
submitted our chief executive officers certification to
the New York Stock Exchange in 2008. Exhibits 31.1 and 31.2
of this Annual Report on
Form 10-K
contain certifications of our chief executive officer and chief
financial officer under Section 302 of the Sarbanes-Oxley
Act of 2002.
We are subject to numerous known and unknown risks, many of
which are presented below and elsewhere in this Annual Report on
Form 10-K.
Any of the risk factors described below or additional risks and
uncertainties not presently known to us, or that we currently
deem immaterial, could have a material adverse effect on our
business, financial condition and results of operations.
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Risks
Relating to Our Industry
We
operate an independent refinery in Tyler, Texas which may not be
able to withstand volatile market conditions, compete on the
basis of price or obtain sufficient quantities of crude oil in
times of shortage to the same extent as integrated,
multinational oil companies.
We compete with a broad range of companies in our refining and
petroleum product marketing operations. Many of these
competitors are integrated, multinational oil companies that are
substantially larger than we are. Because of their diversity,
integration of operations, larger capitalization, larger and
more complex refineries and greater resources, these companies
may be better able to withstand volatile market conditions
relating to crude oil and refined product pricing, to compete on
the basis of price and to obtain crude oil in times of shortage.
We are
subject to loss of market share or pressure to reduce prices in
order to compete effectively with a changing group of
competitors in a fragmented retail industry.
The markets in which we operate our retail fuel and convenience
stores are highly competitive and characterized by ease of entry
and constant change in the number and type of retailers offering
the products and services found in our stores. We compete with
other convenience store chains, gas stations, supermarkets, drug
stores, discount stores, club stores, mass merchants, fast food
operations and other retail outlets. In some of our markets, our
competitors have been in existence longer and have greater
financial, marketing and other resources than we do. As a
result, our competitors may be able to respond better to changes
in the economy and new opportunities within the industry.
In recent years, several non-traditional retailers, such as
supermarkets, club stores and mass merchants, have affected the
convenience store industry by entering the retail fuel business.
These non-traditional gasoline retailers have obtained a
significant share of the motor fuels market and their market
share is expected to grow. Because of their diversity,
integration of operations, experienced management and greater
resources, these companies may be better able to withstand
volatile market conditions or levels of low or no profitability
in the retail segment. In addition, these retailers may use
promotional pricing or discounts, both at the pump and in the
store, to encourage in-store merchandise sales. These activities
by our competitors could pressure us to offer similar discounts,
adversely affecting our profit margins. Additionally, the loss
of market share by our retail fuel and convenience stores to
these and other retailers relating to either gasoline or
merchandise could have a material adverse effect on our
business, financial condition and results of operations.
Independent owner-operators can operate stores with lower
overhead costs than ours. Should significant numbers of
independent owner-operators enter our market areas, retail
prices in some of our categories may be negatively affected, as
a result of which our profit margins may decline at affected
stores.
Our stores compete, in large part, based on their ability to
offer convenience to customers. Consequently, changes in traffic
patterns and the type, number and location of competing stores
could result in the loss of customers and reduced sales and
profitability at affected stores. Other major competitive
factors include ease of access, pricing, timely deliveries,
product and service selections, customer service, fuel brands,
store appearance, cleanliness and safety.
We
operate in a highly regulated industry and increased costs of
compliance with, or liability for violation of, existing or
future laws, regulations and other requirements could
significantly increase our costs of doing business, thereby
adversely affecting our profitability.
Our industry is subject to extensive laws, regulations and other
requirements including, but not limited to, those relating to
the environment, employment, labor, immigration, minimum wages
and overtime pay, health benefits, working conditions, public
accessibility, the sale of alcohol and tobacco and other
requirements. A violation of any of these requirements could
have a material adverse effect on our business, financial
condition and results of operations.
Under various federal, state and local environmental
requirements, as the owner or operator of our locations, we may
be liable for the costs of removal or remediation of
contamination at our existing or former locations, whether we
knew of, or were responsible for, the presence of such
contamination. We have incurred such liability in
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the past and several of our current and former locations are the
subject of ongoing remediation projects. The failure to timely
report and properly remediate contamination may subject us to
liability to third parties and may adversely affect our ability
to sell or rent our property or to borrow money using our
property as collateral. Additionally, persons who arrange for
the disposal or treatment of hazardous substances also may be
liable for the costs of removal or remediation of these
substances at sites where they are located, regardless of
whether the site is owned or operated by that person. We
typically arrange for the treatment or disposal of hazardous
substances in our refining operations. We do not typically do so
in our retail operations, but we may nonetheless be deemed to
have arranged for the disposal or treatment of hazardous
substances. Therefore, we may be liable for removal or
remediation costs, as well as other related costs, including
fines, penalties and damages resulting from injuries to persons,
property and natural resources.
In the future, we may incur substantial expenditures for
investigation or remediation of contamination that has not been
discovered at our current or former locations or locations that
we may acquire. In addition, new legal requirements, new
interpretations of existing legal requirements, increased
legislative activity and governmental enforcement and other
developments could require us to make additional unforeseen
expenditures. Companies in the petroleum industry, such as us,
are often the target of activist and regulatory activity
regarding pricing, safety, environmental compliance and other
business practices which could result in price controls, fines,
increased taxes or other actions affecting the conduct of our
business. For example, consumer activists are lobbying various
authorities to enact laws and regulations mandating the use of
temperature compensation devices for fuel dispensed at our
retail stores. In addition, the United States Supreme Court
decision in Massachusetts v. Environmental Protection
Agency, 549 U.S. 497 (2007) may prompt further
legislative and regulatory activity in the realm of greenhouse
gas emissions and climate change. Environmental regulation is
becoming more stringent and new environmental laws and
regulations are continuously being enacted or proposed. While it
is impractical to predict the impact that potential regulatory
and activist activity may have, such future activity may result
in increased costs to operate and maintain our facilities, as
well as increased capital outlays to improve our facilities.
Such future activity could also adversely affect our ability to
expand production, result in damaging publicity about us, or
reduce demand for our products. Our need to incur costs
associated with complying with any resulting new legal or
regulatory requirements that are substantial and not adequately
provided for, could have a material adverse effect on our
business, financial condition and results of operations.
Our
refining margins may decline as a result of increases in the
prices of crude oil and other feedstocks.
Our earnings, cash flow and profitability from our refining
operations depend on the margin above fixed and variable
expenses (including the cost of refinery feedstocks, such as
crude oil) at which we are able to sell refined petroleum
products. Refining margins historically have been and are likely
to continue to be volatile, as a result of numerous factors
beyond our control, including the supply of and demand for crude
oil, other feedstocks, gasoline and other refined petroleum
products. Such volatility is affected by, among other things:
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changes in global and local economic conditions;
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domestic and foreign demand for fuel products;
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investor speculation in commodities;
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refined product inventory levels;
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worldwide political conditions, particularly in significant oil
producing regions such as the Middle East, Western Coastal
Africa, the former Soviet Union, and South America;
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the level of foreign and domestic production of crude oil and
refined petroleum products;
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the level of crude oil, other feedstocks and refined petroleum
products imported into the United States;
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utilization rates of refineries in the United States;
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development and marketing of alternative and competing fuels
such as ethanol;
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events that cause disruptions in our distribution channels;
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local factors, including market conditions, adverse weather
conditions and the level of operations of other refineries and
pipelines in our markets; and
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U.S. government regulations.
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In addition, our Tyler refinery has historically processed
primarily light sweet crude oils as opposed to light to medium
sour crude oils. Due to increasing demand for lower sulfur
fuels, light sweet crude oils have historically been more costly
than heavy sour crude oils, and an increase in the cost of light
sweet crude oils could have a material adverse effect on our
business, financial condition and results of operations. As part
of our current capital initiatives, we expect to provide
additional flexibility to the Tyler refinery in 2009 that will
allow it to process more sour crude oils. A substantial or
prolonged decrease in the differential between the price of
light sweet crude oils and more sour crude oils could negatively
impact our earnings and cash flows.
Our
gross profit may decline as a result of increases in the prices
of crude oil, other feedstocks and refined petroleum
products.
Significant increases and volatility in costs of crude oil,
other feedstocks and refined petroleum products could cause our
profits to decline. If the prices for which we can sell our
refined products fail to keep pace with rising prices of crude
oil and other feedstocks, our results of operations will be
negatively impacted. This is especially true for
non-transportation fuel products such as asphalt, butane, coke,
propane and slurry whose prices may not correlate to
fluctuations in the price of crude oil.
Increases in the price of crude oil and other feedstocks could
also result in significant increases in the retail price of
transportation fuel products, higher credit card expenses on
retail fuel sales (because credit card fees are typically
calculated as a percentage of the transaction amount rather than
a percentage of gallons sold) and in lower retail fuel gross
margin per gallon. Increases in the retail price of
transportation fuel products could also diminish consumer demand
for fuel and lead to lower retail fuel sales. In addition, the
volatility in the costs of natural gas and electricity used by
our Tyler refinery and in other operations affect our operating
costs.
Feedstock, fuel and utility prices have been, and will continue
to be, affected by factors that are beyond our control, such as
supply and demand and regulation in both local and regional
markets. This volatility makes it extremely difficult to predict
the impact future wholesale cost fluctuations will have on our
business, financial condition and results of operations. These
factors could materially impact our refining gross profits, fuel
gallon volume, fuel gross profit and overall customer traffic,
which in turn could adversely impact our merchandise sales.
If the
market value of our inventory declines to an amount less than
our LIFO basis, we would record a write-down of inventory and a
non-cash charge to cost of sales, which may affect our
earnings.
The nature of our business requires us to maintain substantial
quantities of crude oil, refined petroleum product and
blendstock inventories. Because crude oil and refined petroleum
products are commodities, we have no control over the changing
market value of these inventories. Because our refining
inventory is valued at the lower of cost or market value under
the last-in,
first-out (LIFO) inventory valuation methodology, we
would record a write-down of inventory and a non-cash charge to
cost of sales if the market value of our inventory were to
decline to an amount less than our LIFO basis. For example, at
December 31, 2008, market values had fallen below most of
our LIFO inventory layer values, generating a pre-tax write-down
of approximately $10.9 million.
Anti-smoking
measures, increases in tobacco taxes and wholesale cost
increases of tobacco products could reduce our tobacco product
sales.
Sales of tobacco products accounted for approximately 8%, 9% and
10% of total net sales of those stores constituting the
continuing operations of our retail segment for the years ended
December 31, 2008, 2007 and 2006, respectively. Significant
increases in wholesale cigarette costs, a reduction to or
elimination of manufacturer rebates, increased taxes on tobacco
products (such as the increase in the federal tax by
approximately $0.62 per pack of cigarettes, effective
April 1, 2009), declines in the percentage of smokers in
the general population, additional legal restrictions on smoking
in public or private establishments, future legislation and
national and local campaigns
18
to discourage smoking in the United States have had an adverse
effect on the demand for tobacco products and could have a
material adverse effect on our business, financial condition and
results of operations.
Competitive pressures in our markets can make it difficult to
pass any additional cost increases associated with these
products to our customers. This could materially and adversely
affect our retail price of cigarettes, cigarette unit volume and
net sales, merchandise gross profit and overall customer
traffic. Because we derive a significant percentage of our net
sales from tobacco products, a decline in net sales from the
sale of tobacco products or decrease in margins on our tobacco
product sales could have a material adverse effect on our
business, financial condition and results of operations.
A
terrorist attack on our assets, or threats of war or actual war,
may hinder or prevent us from conducting our
business.
Terrorist attacks in the United States and the war with Iraq, as
well as events occurring in response or similar to or in
connection with them, may harm our business. Energy-related
assets (which could include refineries, pipelines and terminals
such as ours) may be at greater risk of future terrorist attacks
than other possible targets in the United States. In addition,
the State of Israel, where our majority stockholder, Delek Group
Ltd. (Delek Group), is based, has suffered armed
conflicts and political instability in recent years. We may be
more susceptible to terrorist attack as a result of our
connection to an Israeli owner. On the date of this report,
three of our directors reside in Israel.
A direct attack on our assets or the assets of others used by us
could have a material adverse effect on our business, financial
condition and results of operations. In addition, any terrorist
attack could have an adverse impact on energy prices, including
prices for our crude oil, other feedstocks and refined petroleum
products, and an adverse impact on the margins from our refining
and petroleum product marketing operations. In addition,
disruption or significant increases in energy prices could
result in government-imposed price controls.
Increased
consumption of renewable fuels could lead to a decrease in fuel
prices and/or a reduction in demand for refined
fuels.
Regulatory initiatives have caused an increase in the
consumption of renewable fuels such as ethanol. In the future,
renewable fuels may continue to be blended with, or may replace,
refined fuels. Such increased use of renewable fuels may result
in an increase in fuel supply and corresponding decrease in fuel
prices. Increased use of renewable fuels may also result in a
decrease in demand for refined fuels. A significant decrease in
fuel prices or refined fuel demand could have an adverse impact
on our financial results.
Risks
Relating to Our Business
We are
particularly vulnerable to disruptions to our refining
operations, because our refining operations are concentrated in
one facility.
Because all of our refining operations are concentrated in the
Tyler refinery, significant disruptions at the Tyler facility
could have a material adverse effect on our business, financial
condition or results of operations. For example, on
November 20, 2008 an explosion and fire occured at our
refinery in Tyler, Texas which resulted in a suspension of
production that continues through the date of this report.
Management currently anticipates that the refinery will resume
operations in May 2009. However, the damage to equipment and
disruption to operations, as well as the costs and time
necessary to resume operations, may be greater than currently
anticipated which could have a material adverse effect on our
business, financial condition and results of operations.
General
economic conditions and the current financial crisis may
adversely affect our business, operating results and financial
condition.
The current domestic economy and economic slowdown may have
serious negative consequences for our business and operating
results. Our performance is subject to domestic economic
conditions and their impact on levels of consumer spending. Some
of the factors affecting consumer spending include general
economic conditions, unemployment, consumer debt, reductions in
net worth based on recent severe market declines, residential
real estate values, mortgage markets, taxation, energy prices,
interest rates, consumer confidence and
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other macroeconomic factors. During a period of economic
weakness or uncertainty, current or potential customers may
travel less, reduce or defer purchases, go out of business or
have insufficient funds to buy or pay for our products and
services.
Moreover, the current crisis has had a significant material
adverse impact on a number of financial institutions and has
limited access to capital and credit for many companies. This
could, among other things, make it more difficult for us to
obtain (or increase our cost of obtaining) capital and financing
for our operations. Our access to additional capital may not be
available on terms acceptable to us or at all.
Due to
the concentration of our stores in the southeastern United
States, an economic downturn in that region could cause our
sales and the value of our assets to decline.
Substantially all of our retail fuel and convenience stores are
located in the southeastern United States, primarily in the
states of Alabama, Georgia and Tennessee. As a result, our
results of operations are subject to general economic conditions
in that region. An economic downturn in the Southeast, such as
the current economic downturn, could cause our sales and the
value of our assets to decline and have a material adverse
effect on our business, financial condition and results of
operations.
We may
not be able to successfully execute our strategy of growth
through acquisitions.
A significant part of our growth strategy is to acquire assets
such as refineries, pipelines, terminals, and retail fuel and
convenience stores that complement our existing sites or broaden
our geographic presence. If attractive opportunities arise, we
may also acquire assets in new lines of business that are
complementary to our existing businesses. Through eight major
transactions spanning from our inception in 2001 through
December 31, 2008, we acquired our refinery and refined
products terminals in Tyler, we acquired approximately 500
retail fuel and convenience stores and we developed our
wholesale fuel business. We expect to continue to acquire retail
fuel and convenience stores, refinery assets and product
terminals and pipelines as a major element of our growth
strategy, however:
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we may not be able to identify suitable acquisition candidates
or acquire additional assets on favorable terms;
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we usually compete with others to acquire assets, which
competition may increase, and, any level of competition could
result in decreased availability or increased prices for
acquisition candidates;
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we may experience difficulty in anticipating the timing and
availability of acquisition candidates;
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since the convenience store industry is dominated by small,
independent operators that own fewer than ten
stores, we will likely need to complete numerous small
acquisitions, rather than a few major acquisitions, to
substantially increase our number of retail fuel and convenience
stores;
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the need to complete numerous acquisitions will require
significant amounts of our managements time;
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we may not be able to obtain the necessary financing, on
favorable terms or at all, to finance any of our potential
acquisitions; and
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as a public company, we are subject to reporting obligations,
internal controls and other accounting requirements with respect
to any business we acquire, which may prevent or negatively
affect the valuation of some acquisitions we might otherwise
deem favorable or increase our acquisition costs.
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The occurrence of any of these factors could adversely affect
our ability to complete further acquisitions.
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Acquisitions
involve risks that could cause our actual growth or operating
results to differ adversely compared with our
expectations.
Due to our emphasis on growth through acquisitions, we are
particularly susceptible to transactional risks. For example:
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during the acquisition process, we may fail or be unable to
discover some of the liabilities of companies or businesses that
we acquire;
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we may assume contracts or other obligations in connection with
particular acquisitions on terms that are less favorable or
desirable than the terms that we would expect to obtain if we
negotiated the contracts or other obligations directly;
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we may fail to successfully integrate or manage acquired
refining, pipeline and terminal assets, retail fuel and
convenience stores, or other assets;
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acquired retail fuel and convenience stores, refineries,
pipelines, terminals or other assets may not perform as we
expect or we may not be able to obtain the cost savings and
financial improvements we anticipate;
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acquisitions may require us to incur additional debt or issue
additional equity;
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we may fail to grow our existing systems, financial controls,
information systems, management resources and human resources in
a manner that effectively supports our growth; and
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to the extent that we acquire assets in complementary new lines
of business, we may become subject to additional regulatory
requirements and additional risks that are characteristic or
typical of these new lines of business.
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The occurrence of any of these factors could adversely affect
our business, financial condition and results of operations.
We may
incur significant costs and liabilities with respect to
investigation and remediation of existing environmental
conditions at our Tyler refinery.
Prior to our purchase of the Tyler refinery and pipeline, the
previous owner had been engaged for many years in the
investigation and remediation of liquid hydrocarbons which
contaminated soil and groundwater at the purchased facilities.
Upon purchase of the facilities, we became responsible and
liable for certain costs associated with the continued
investigation and remediation of known and unknown impacted
areas at the refinery. In the future, it may be necessary to
conduct further assessments and remediation efforts at the
refinery and pipeline locations. In addition, we have identified
and self-reported certain other environmental matters subsequent
to our purchase of the refinery. Based upon environmental
evaluations performed internally and by third parties subsequent
to our purchase of the Tyler refinery, we recorded an
environmental liability of approximately $7.7 million as of
December 31, 2008 for the estimated costs of environmental
remediation for our refinery. We expect remediation of soil and
groundwater at the refinery to continue for the foreseeable
future. The need to make future expenditures for these purposes
that exceed the amounts we estimate and accrue for could have a
material adverse effect on our business, financial condition and
results of operations.
We may
incur significant costs and liabilities in connection with site
contamination, new environmental regulations and prior
non-compliance with air emission regulations.
In the future, we may incur substantial expenditures for
investigation or remediation of contamination that has not been
discovered at our current or former locations or locations that
we may acquire. In addition, new legal requirements, new
interpretations of existing legal requirements, increased
legislative activity and governmental enforcement and other
developments could require us to make additional unforeseen
expenditures. We anticipate that compliance with new regulations
will require us to spend approximately $13.0 million in
capital costs in 2009. We are also in discussions with the EPA
and the DOJ, concerning some other enforcement actions; the
outcome of which we believe will not result in a material
adverse effect on our business, financial condition or results
of
21
operations. However, a settlement with the EPA could result in
additional capital expenditures and potential penalties that
could have a material adverse effect on our business, financial
condition and results of operations.
We
could incur substantial costs or disruptions in our business if
we cannot obtain or maintain necessary permits and
authorizations or otherwise comply with health, safety,
environmental and other laws and regulations.
Our operations require numerous permits and authorizations under
various laws and regulations. These authorizations and permits
are subject to revocation, renewal or modification and can
require operational changes to limit impacts or potential
impacts on the environment
and/or
health and safety. A violation of authorization or permit
conditions or other legal or regulatory requirements could
result in substantial fines, criminal sanctions, permit
revocations, injunctions,
and/or
facility shutdowns. In addition, major modifications of our
operations could require modifications to our existing permits
or upgrades to our existing pollution control equipment. Any or
all of these matters could have a negative effect on our
business, results of operations and cash flows.
The
dangers inherent in our operations could cause disruptions and
expose us to potentially significant costs and
liabilities.
Our refining operations are subject to significant hazards and
risks inherent in refining operations and in transporting and
storing crude oil, intermediate and refined petroleum products.
These hazards and risks include, but are not limited to, natural
or weather-related disasters, fires, explosions, pipeline
ruptures and spills, third party interference and mechanical
failure of equipment at our or third-party facilities, and other
events beyond our control. The occurrence of any of these events
could result in production and distribution difficulties and
disruptions, environmental pollution, personal injury or death
and other damage to our properties and the properties of others.
In addition, the Tyler refinery is located in a populated area.
Any release of hazardous material or catastrophic event could
affect our employees and contractors at the refinery as well as
persons outside the refinery grounds. In the event that personal
injuries or deaths result from such events, we would likely
incur substantial legal costs and liabilities. The extent of
these costs and liabilities could exceed the limits of our
available insurance. As a result, any such event could have a
material adverse effect on our business, results of operations
and cash flows.
For example, the incident at our Tyler refinery on
November 20, 2008 resulted in two employee deaths and a
suspension of production that continues through the date of this
report. The damage to equipment and disruption to operations, as
well as the costs and time necessary to resume operations, may
be greater than currently anticipated. In addition, we are
currently participating in an investigation of this incident by
OSHA which may result in civil penalties or other enforcement
actions. We may also face lawsuits or other third party claims
as a result of this incident. Amounts we may pay in connection
with these claims may not be covered by insurance.
We also operate approximately forty fuel delivery trucks. These
trucks regularly transport highly combustible motor fuels on
public roads. A motor vehicle accident involving one of our
trucks could result in significant personal injuries
and/or
property damage.
Interruptions
in the supply and delivery of crude oil may affect our refining
interests and limitations in systems for the delivery of crude
oil may inhibit the growth of our refining
interests.
Our Tyler refinery processes primarily light sweet crude oils
which are less readily available to us than heavier, more sour
crude oils. The refinery receives substantially all of its crude
oil from third parties. We could experience an interruption or
reduction of supply and delivery, or an increased cost of
receiving crude oil, if the ability of these third parties to
transport crude oil is disrupted because of accidents,
governmental regulation, terrorism, other third-party action or
other events beyond our control. The unavailability for our use
for a prolonged period of time of any system of delivery of
crude oil could have a material adverse effect on our business,
financial condition or results of operations.
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Moreover, limitations in delivery capacity may not allow our
refining interests to draw sufficient crude oil to support
increases in refining output. In order to materially increase
refining output, existing crude delivery systems may require
upgrades or supplementation, which may require substantial
additional capital expenditures.
Our
Tyler refinery has only limited access to an outbound pipeline,
which we do not own, for distribution of our refined petroleum
products.
For the year ended December 31, 2008, approximately 77.1%
of our refinery sales volume in Tyler was completed through a
rack system located at the refinery. Unlike other refiners, we
do not own, and have limited access to, an outbound pipeline for
distribution of our refinery products to our Tyler customers.
Our lack of access to an outbound pipeline may undermine our
ability to attract new customers for our refined petroleum
products or increase sales of our refinery products.
From
time to time, our cash needs may exceed our internally generated
cash flow, and our business could be materially and adversely
affected if we are not able to obtain the necessary funds from
financing activities.
We have significant short-term cash needs to satisfy working
capital requirements such as crude oil purchases which fluctuate
with the pricing and sourcing of crude oil. We rely in part on
our ability to borrow to collateralize or purchase crude oil for
our Tyler refinery. If the price of crude oil increases
significantly, we may not have sufficient borrowing capacity,
and may not be able to sufficiently increase borrowing capacity,
under our existing credit facilities to purchase enough crude
oil to operate the Tyler refinery at full capacity. Our failure
to operate the Tyler refinery at full capacity could have a
material adverse effect on our business, financial condition and
results of operations. We also have significant long-term needs
for cash, including those to support our expansion and upgrade
plans, as well as for regulatory compliance.
If credit markets tighten further, it may become more difficult
to obtain cash from third party sources. If we cannot generate
cash flow or otherwise secure sufficient liquidity to support
our short-term and long-term capital requirements, we may not be
able to comply with regulatory deadlines or pursue our business
strategies, in which case our operations may not perform as well
as we currently expect.
The November 20, 2008 incident at our Tyler refinery
resulted in a suspension of production that continues through
the date of this report. Refinings ability to borrow under
its primary credit facility has also been suspended during the
period of inactivity. Because we have undertaken and intend to
continue substantial repair, maintenance and improvement
projects at the refinery during this period, we will be
dependent upon the receipt of proceeds under our insurance
policies to generate necessary cash flows, and our inability to
obtain such proceeds could materially affect our ability to
execute the projects.
In addition, the resumption of borrowing availability under
Refinings credit facility is subject to the attainment of
certain operational milestones. If we are unable to meet these
milestones in a timely manner, we could default under our credit
facility and our ability to generate cash flows to support our
resumed operations could be materially affected.
Changes
in our credit profile could affect our relationships with our
suppliers, which could have a material adverse effect on our
liquidity and our ability to operate the Tyler refinery at full
capacity.
Changes in our credit profile could affect the way crude oil
suppliers view our ability to make payments. As a result,
suppliers could shorten the payment terms of their invoices with
us or require us to provide significant collateral to them that
we do not currently provide. Due to the large dollar amounts and
volume of our crude oil and other feedstock purchases, any
imposition by our suppliers of more burdensome payment terms on
us may have a material adverse effect on our liquidity and our
ability to make payments to our suppliers. This in turn could
cause us to be unable to operate the Tyler refinery at full
capacity. A failure to operate the Tyler refinery at full
capacity could adversely affect our profitability and cash flows.
23
An
interruption or termination of supply and delivery of refined
products to our wholesale business could result in a decline in
our sales and earnings.
Our marketing segment sells refined products produced by
refineries owned by third parties. In 2008, Magellan and
Northville were the sole suppliers to our marketing segment. We
could experience an interruption or termination of supply or
delivery of refined products if these refineries or our
suppliers partially or completely ceased operations, temporarily
or permanently. The ability of these refineries and our
suppliers to supply refined products to us could be disrupted by
anticipated events such as scheduled upgrades or maintenance, as
well as events beyond their control, such as unscheduled
maintenance, fires, floods, storms, explosions, power outages,
accidents, acts of terrorism or other catastrophic events, labor
difficulties and work stoppages, governmental or private party
litigation, or legislation or regulation that adversely impacts
refinery operations. In addition, any reduction in capacity of
other pipelines that connect with our suppliers pipelines
or our pipelines due to testing, line repair, reduced operating
pressures, or other causes could result in reduced volumes of
refined product supplied to our marketing business. A reduction
in the volume of refined products supplied to our marketing
segment could adversely affect our sales and earnings.
An
increase in competition in the market in which we sell our
refined products could lower prices and adversely affect our
sales and profitability.
Our Tyler refinery is the only supplier of a full range of
refined petroleum products within a radius of approximately
100 miles of its location and there are no competitive fuel
loading terminals within approximately 90 miles of our
San Angelo terminal. If a refined petroleum products
delivery pipeline is built in or around the Tyler, Texas area,
or a competing terminal is built closer to the San Angelo
area, we could lose our niche market advantage, which could have
a material adverse effect on our business, financial condition
and results of operations.
In addition, the incident at our Tyler refinery on
November 20, 2008 resulted in a suspension of production
that continues through the date of this report. We assume that
our customers will locate other sources of supply for so long as
we are unable to service them. Once our production resumes, it
may be difficult for us to reestablish customers, volumes and
pricing similar to that which existed prior to the accident.
We may
be unable to negotiate market price risk protection in contracts
with unaffiliated suppliers of refined products.
During the year ended December 31, 2008, we obtained 70.3%
of our supply of refined products for our marketing segment
under contracts that contain provisions that mitigate the market
price risk inherent in the purchase and sale of refined
products. We cannot assure you that in the future we will be
able to negotiate similar market price protections in other
contracts that we enter into for the supply of refined products
or ethanol. To the extent that we purchase inventory at prices
that do not compare favorably to the prices at which we are able
to sell refined products, our sales and margins may be adversely
affected.
Our
debt levels may limit our flexibility in obtaining additional
financing and in pursuing other business
opportunities.
We have a significant amount of debt. As of December 31,
2008, we had total debt of $286.0 million, including
current maturities of $83.9 million. In addition to our
outstanding debt, as of December 31, 2008, our borrowing
availability under our various credit facilities was
$164.0 million.
Our significant level of debt could have important consequences
for us. For example, it could:
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increase our vulnerability to general adverse economic and
industry conditions;
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require us to dedicate a substantial portion of our cash flow
from operations to service our debt and lease obligations,
thereby reducing the availability of our cash flow to fund
working capital, capital expenditures and other general
corporate purposes;
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limit our flexibility in planning for, or reacting to, changes
in our business and the industry in which we operate;
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place us at a disadvantage relative to our competitors that have
less indebtedness or better access to capital by, for example,
limiting our ability to enter into new markets, renovate our
stores or pursue acquisitions or other business opportunities;
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limit our ability to borrow additional funds in the future; and
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increase the interest cost of our borrowed funds.
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In addition, a substantial portion of our debt has a variable
rate of interest, which increases our exposure to interest rate
fluctuations, to the extent we elect not to hedge such exposures.
If we are unable to meet our debt (principal and interest) and
lease obligations, we could be forced to restructure or
refinance our obligations, seek additional equity financing or
sell assets, which we may not be able to do on satisfactory
terms or at all. Our default on any of those obligations could
have a material adverse effect on our business, financial
condition and results of operations. In addition, if new debt is
added to our current debt levels, the related risks that we now
face would intensify.
Our
debt agreements contain operating and financial restrictions
that might constrain our business and financing
activities.
The operating and financial restrictions and covenants in our
credit facilities and any future financing agreements could
adversely affect our ability to finance future operations or
capital needs or to engage, expand or pursue our business
activities. For example, to varying degrees our credit
facilities restrict our ability to:
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declare dividends and redeem or repurchase capital stock;
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prepay, redeem or repurchase debt;
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make loans and investments;
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incur additional indebtedness or amend our debt and other
material agreements;
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make capital expenditures;
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engage in mergers, acquisitions and asset sales; and
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enter into some intercompany arrangements and make some
intercompany payments, which in some instances could restrict
our ability to use the assets, cash flow or earnings of one
segment to support the other segment.
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Other restrictive covenants require that we meet fixed charge
coverage, interest charge coverage and leverage tests as
described in the credit facility agreements. Our ability to
comply with the covenants and restrictions contained in our debt
instruments may be affected by events beyond our control,
including prevailing economic, financial and industry
conditions. If market or other economic conditions deteriorate,
our ability to comply with these covenants and restrictions may
be impaired. If we breach any of the restrictions or covenants
in our debt agreements, a significant portion of our
indebtedness may become immediately due and payable, and our
lenders commitments to make further loans to us may
terminate. We might not have, or be able to obtain, sufficient
funds to make these immediate payments. In addition, our
obligations under our credit facilities are secured by
substantially all of our assets. If we are unable to timely
repay our indebtedness under our credit facilities, the lenders
could seek to foreclose on the assets or we may be required to
contribute additional capital to our subsidiaries. Any of these
outcomes could have a material adverse effect on our business,
financial condition and results of operations. An example of
restrictions that impact our businesses can be seen in the
discussion of the SunTrust ABL Revolver in Note 11 and
Note 22 of Item 8, Financial Statements and
Supplementary Data of this Annual Report on
Form 10-K.
Compliance
with and changes in tax laws could adversely affect our
performance.
We are subject to extensive tax liabilities, including federal,
state, and foreign income taxes and transactional taxes such as
excise, sales/use, payroll, franchise, withholding, and ad
valorem taxes. New tax laws and regulations and changes in
existing tax laws and regulations are continuously being enacted
or proposed that could result in increased expenditures for tax
liabilities in the future. Certain of these liabilities are
subject to periodic audits by the
25
respective taxing authority which could increase our tax
liabilities. Subsequent changes to our tax liabilities as a
result of these audits may also subject us to interest and
penalties.
We may
seek to grow by opening new retail fuel and convenience stores
in new geographic areas.
Since our inception, we have grown primarily by acquiring retail
fuel and convenience stores in the southeastern United States.
We may seek to grow by selectively pursuing acquisitions or by
opening new retail fuel and convenience stores in states
adjacent to those in which we currently operate, or in which we
currently have a relatively small number of stores. This growth
strategy would present numerous operational and competitive
challenges to our senior management and employees and would
place significant pressure on our operating systems. In
addition, we cannot assure you that consumers located in the
regions in which we may expand our retail fuel and convenience
store operations would be as receptive to our retail fuel and
convenience stores as consumers in our existing markets. The
achievement of our expansion plans will depend in part upon our
ability to:
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select, and compete successfully in, new markets;
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obtain suitable sites at acceptable costs;
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realize an acceptable return on the cost of capital invested in
new facilities;
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hire, train, and retain qualified personnel;
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integrate new retail fuel and convenience stores into our
existing distribution, inventory control, and information
systems;
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expand relationships with our suppliers or develop relationships
with new suppliers; and
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secure adequate financing, to the extent required.
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We cannot assure you that we will achieve our expansion goals,
manage our growth effectively, or operate our existing and new
retail fuel and convenience stores profitability. The failure to
achieve any of the foregoing could have a material adverse
effect on our business, financial condition and results of
operations.
Adverse
weather conditions or other unforeseen developments could damage
our facilities, reduce customer traffic and impair our ability
to produce and deliver refined petroleum products or receive
supplies for our retail fuel and convenience
stores.
The regions in which we operate are susceptible to severe storms
including hurricanes, thunderstorms, tornadoes, extended periods
of rain, ice storms and snow, all of which we have experienced
in the past few years. Inclement weather conditions could damage
our facilities, interrupt production, adversely impact consumer
behavior, travel and retail fuel and convenience store traffic
patterns or interrupt or impede our ability to operate our
locations. If such conditions prevail in Texas, they could
interrupt or undermine our ability to produce and transport
products from our Tyler refinery and receive and distribute
products at our terminals. Regional occurrences, such as energy
shortages or increases in energy prices, fires and other natural
disasters, could also hurt our business. The occurrence of any
of these developments could have a material adverse effect on
our business, financial condition and results of operations.
Our
operating results are seasonal and generally lower in the first
and fourth quarters of the year for our refining and marketing
segments and in the first quarter of the year for our retail
segment. We depend on favorable weather conditions in the spring
and summer months.
Demand for gasoline and other merchandise is generally higher
during the summer months than during the winter months due to
seasonal increases in motor vehicle traffic. As a result, the
operating results of our refining segment and wholesale fuel
segment are generally lower for the first and fourth quarters of
each year. Seasonal fluctuations in traffic also affect sales of
motor fuels and merchandise in our retail fuel and convenience
stores. As a result, the operating results of our retail segment
are generally lower for the first quarter of the year.
Weather conditions in our operating area also have a significant
effect on our operating results. Customers are more likely to
purchase higher profit margin items at our retail fuel and
convenience stores, such as fast foods,
26
fountain drinks and other beverages and more gasoline during the
spring and summer months, thereby typically generating higher
revenues and gross margins for us in these periods. Unfavorable
weather conditions during these months and a resulting lack of
the expected seasonal upswings in traffic and sales could have a
material adverse effect on our business, financial condition and
results of operations.
We
depend on one wholesaler for a significant portion of our
convenience store merchandise.
During the year ended December 31, 2008, we purchased
approximately 56% of our general merchandise, including most
tobacco products and grocery items, from a single wholesale
grocer, Core-Mark International, Inc.. A change of merchandise
suppliers, a disruption in supply or a significant change in our
relationship or pricing with our principal merchandise supplier
could lead to an increase in our cost of goods or a reduction in
the reliability of timely deliveries and could have a material
adverse effect on our business, financial condition and results
of operations.
In addition, we believe that our arrangements with vendors with
respect to allowances, payment terms and operational support
commitments, have enabled us to decrease the operating expenses
of convenience stores that we acquire. If we are unable to
maintain favorable arrangements with these vendors, we may be
unable to continue to effect operating expense reductions at
convenience stores we have acquired or will acquire.
Due to
our minority ownership position in Lion Oil Company, we cannot
control the operations of the El Dorado refinery or the
corporate and management policies of Lion Oil.
As of December 31, 2008, we owned approximately 34.6% of
the issued and outstanding common stock of Lion Oil Company, a
privately held Arkansas corporation that owns and operates a
refinery in El Dorado, Arkansas. Approximately 53.7% of the
issued and outstanding common stock of Lion Oil is owned by one
shareholder. This controlling shareholder is party to a
management agreement with Lion Oil and, due to its majority
equity ownership position, is able to elect a majority of the
Lion Oil board of directors. As a result of our minority
ownership position and the controlling shareholders
majority equity ownership position and contractual management
rights, we are unable to control or influence the operations of
the refinery in El Dorado, Arkansas.
So long as there is a controlling shareholder of Lion Oil that
maintains a majority equity ownership position in, and the
contractual management rights with, Lion Oil, the controlling
shareholder will continue to control the election of a majority
of Lion Oils directors, influence Lion Oils
corporate and management policies (including the declaration of
dividends and the timing and preparation of its financial
statements) and determine, without our consent, the outcome of
any corporate transaction or other matter submitted to Lion Oil
shareholders for approval, including potential mergers or
acquisitions, asset sales and other significant corporate
transactions.
Our
minority ownership position in Lion Oil is illiquid because
there is no active trading market for shares of Lion Oil common
stock.
Because Lion Oil is a privately held corporation, there is no
active trading market for shares of Lion Oil common stock. As a
result, we cannot assure you that we will be able to increase or
decrease our interest in Lion Oil, or that if we do, we will be
able to do so upon favorable terms or at favorable prices.
If our
proprietary technology systems are ineffective in enabling our
managers to efficiently manage our operations, our operating
performance will decline.
We invest in and rely heavily upon our proprietary information
technology systems to enable our managers to access real-time
data from our supply chain and inventory management systems, our
security systems and to monitor customer and sales information.
For example, our proprietary technology systems enable our
managers to view data for our stores, merchandise or fuel on an
aggregate basis or by specific store, type of merchandise or
fuel product, which in turn enables our managers to quickly
determine whether budgets and projected margins are being met
and to make adjustments in response to any shortfalls. In the
absence of this proprietary information technology, our managers
would be unable to respond as promptly in order to reduce
inefficiencies in our cost structure and maximize our sales and
margins.
27
Our
insurance policies do not cover all losses, costs or liabilities
that we may experience, and insurance companies that currently
insure companies in the energy industry may cease to do so or
substantially increase premiums.
While we carry property, business interruption, pollution and
casualty insurance, we do not maintain insurance coverage
against all potential losses. We could suffer losses for
uninsurable or uninsured risks or in amounts in excess of
existing insurance coverage. The occurrence of an event that is
not fully covered by insurance could have a material adverse
effect on our business, financial condition and results of
operations.
The energy industry is highly capital intensive, and the entire
or partial loss of individual facilities can result in
significant costs to both industry companies, such as us, and
their insurance carriers. In recent years, several large energy
industry claims have resulted in significant increases in the
level of premium costs and deductible periods for participants
in the energy industry. For example, hurricanes in recent years
have caused significant damage to several petroleum refineries
along the Gulf Coast, in addition to numerous oil and gas
production facilities and pipelines in that region. As a result
of large energy industry claims, insurance companies that have
historically participated in underwriting energy-related
facilities may discontinue that practice, or demand
significantly higher premiums or deductible periods to cover
these facilities. If significant changes in the number or
financial solvency of insurance underwriters for the energy
industry occur, or if other adverse conditions over which we
have no control prevail in the insurance market, we may be
unable to obtain and maintain adequate insurance at reasonable
cost.
In addition, although we have business interruption insurance,
it may not cover the full amount of losses we may suffer as a
result of the suspension of operations at the Tyler refinery. If
our insurance does not cover the full amount of the losses, this
could have a material adverse effect on our business, financial
condition and results of operations.
In addition, we cannot assure you that our insurers will renew
our insurance coverage on acceptable terms, if at all, or that
we will be able to arrange for adequate alternative coverage in
the event of non-renewal. The incident on November 20, 2008
resulted in significant property damage to, and suspension of
operations at our Tyler refinery. Our insurance claims in
connection with the incident may affect the terms upon which our
insurance coverage can be renewed. The unavailability of full
insurance coverage to cover events in which we suffer
significant losses could have a material adverse effect on our
business, financial condition and results of operations.
A
substantial portion of our refinery workforce is unionized, and
we may face labor disruptions that would interfere with our
operations.
As of December 31, 2008, we employed 256 people at our
Tyler refinery and pipeline. From among these employees, 149 of
our operations and maintenance hourly employees and 40 truck
drivers at the refinery were covered by separate collective
bargaining agreements which expire on March 31, 2009 and
January 31, 2012, respectively. Although these collective
bargaining agreements contain provisions to discourage strikes
or work stoppages, we cannot assure you that strikes or work
stoppages will not occur. A strike or work stoppage could have a
material adverse effect on our business, financial condition and
results of operations.
We are
dependent on fuel sales at our retail fuel and convenience
stores which makes us susceptible to increases in the cost of
gasoline and interruptions in fuel supply.
Net fuel sales at stores representing the continuing operations
of our retail segment represented approximately 79%, 76% and 75%
of total net sales of our retail segment for 2008, 2007 and
2006, respectively. Our dependence on fuel sales makes us
susceptible to increases in the cost of gasoline and diesel
fuel. As a result, fuel profit margins have a significant impact
on our earnings. The volume of fuel sold by us and our fuel
profit margins are affected by numerous factors beyond our
control, including the supply and demand for fuel, volatility in
the wholesale fuel market and the pricing policies of
competitors in local markets. Although we can rapidly adjust our
pump prices to reflect higher fuel costs, a material increase in
the price of fuel could adversely affect demand. A material,
sudden increase in the cost of fuel that causes our fuel sales
to decline could have a material adverse effect on our business,
financial condition and results of operations.
28
Our dependence on fuel sales makes us susceptible to
interruptions in fuel supply. At December 31, 2008, fuel
from the U.S. Gulf Coast transported to us through the
Colonial and Plantation pipelines was the primary source of fuel
supply for approximately 78% of our retail fuel and convenience
stores. To mitigate the risks of cost volatility, we typically
have no more than a five day supply of fuel at each of our
stores. Our fuel contracts do not guarantee an uninterrupted,
unlimited supply in the event of a shortage. In addition,
gasoline sales generate customer traffic to our retail fuel and
convenience stores. As a result, decreases in gasoline sales, in
the event of a shortage or otherwise, could adversely affect our
merchandise sales. A serious interruption in the supply of
gasoline could have a material adverse effect on our business,
financial condition and results of operations.
We may
incur losses as a result of our forward contract activities and
derivative transactions.
We occasionally use derivative financial instruments, such as
interest rate swaps and interest rate cap agreements, and
fuel-related derivative transactions to partially mitigate the
risk of various financial exposures inherent in our business. We
expect to continue to enter into these types of transactions. In
connection with such derivative transactions, we may be required
to make payments to maintain margin accounts and to settle the
contracts at their value upon termination. The maintenance of
required margin accounts and the settlement of derivative
contracts at termination could cause us to suffer losses or
limited gains. In particular, derivative transactions could
expose us to the risk of financial loss upon unexpected or
unusual variations in the sales price of crude oil and that of
wholesale gasoline. We cannot assure you that the strategies
underlying these transactions will be successful. If any of the
instruments we utilize to manage our exposure to various types
of risk is not effective, we may incur losses.
If we
violate state laws regulating our sale of tobacco and alcohol
products, or if these laws are changed, our results of
operations will suffer.
We sell tobacco products in all of our stores and alcohol
products in approximately 94% of our stores. Our net sales from
the sale of tobacco and alcohol products were approximately
$201.3 million, $200.4 million and $164.1 million
for the years ended December 31, 2008, 2007 and 2006,
respectively. State laws regulate the sale of tobacco and
alcohol products. For example, state and local regulatory
agencies have the power to approve, revoke, suspend or deny
applications for, and renewals of, permits and licenses relating
to the sale of these products or to seek other remedies. Certain
states regulate relationships, including overlapping ownership,
among alcohol manufacturers, wholesalers and retailers and may
deny or revoke licensure if relationships in violation of the
state laws exist. In addition, certain states have adopted or
are considering adopting warm beer laws that seek to
discourage driving under the influence of alcohol by prohibiting
the sale of refrigerated beer. Our violation of state laws
regulating our sale of tobacco and alcohol products or a change
in these laws, such as the adoption of a warm beer
law in one or more of the states we operate, could have a
material adverse effect on our business, financial condition and
results of operations.
If we
fail to meet our obligations under our long-term branded
gasoline supply agreement with BP, the agreement may be
terminated and we may incur penalties.
In December 2005, we entered into a branded gasoline jobber
supply agreement with BP to purchase a portion of our gasoline
products for a minimum of 15 years. The agreement requires
us to purchase specified minimum quantities of branded gasoline
products annually, which quantities escalate on a yearly basis.
Sales of BP branded gasoline under this agreement accounted for
approximately 13%, 15% and 14% of our total fuel sales volume in
the years ended December 31, 2008, 2007 and 2006
respectively. If we fail to purchase the applicable annual
minimum quantities, BP may terminate the agreement and we could
be required to pay BP damages equal to the difference between
the specified contractual minimum annual gallons of gasoline
products and the amount actually purchased by us, multiplied by
a specified per gallon amount. The termination of the agreement
by BP and the imposition of damages could have a material
adverse effect on our business, financial condition and results
of operations. We recorded liabilities for failure to purchase
required contractual volume minimums of $0.3 million in
2008 and $0.2 million in both 2007 and 2006.
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If
there is negative publicity concerning the BP, Exxon, Shell,
Conoco, Marathon or Chevron brand names, sales at certain of our
stores may suffer.
Fuel sold under the BP, Exxon, Shell, Conoco, Marathon and
Chevron brand names represented approximately 60% of total fuel
sales volume for the retail segment during the year ended
December 31, 2008. If there is negative publicity
concerning any of these major oil companies, we could suffer a
decline in sales volume at these stores and it could have a
material adverse effect on our business, financial condition and
results of operations.
It may
be difficult to serve process on or enforce a United States
judgment against those of our directors who reside in
Israel.
On the date of this report, three of our seven directors reside
in the State of Israel. As a result, you may have difficulty
serving legal process within the United States upon any of these
persons. You may also have difficulty enforcing, both in and
outside the United States, judgments you may obtain in United
States courts against these persons in any action, including
actions based upon the civil liability provisions of United
States federal or state securities laws, because a substantial
portion of the assets of these directors is located outside of
the United States. Furthermore, there is substantial doubt that
the courts of the State of Israel would enter judgments in
original actions brought in those courts predicated on
U.S. federal or state securities laws.
If we
are, or become, a U.S. real property holding corporation,
special tax rules may apply to a sale, exchange or other
disposition of common stock and
non-U.S.
holders may be less inclined to invest in our stock as they may
be subject to U.S. federal income tax in certain
situations.
A
non-U.S. holder
may be subject to U.S. federal income tax with respect to
gain recognized on the sale, exchange or other disposition of
common stock if we are, or were, a U.S. real property
holding corporation, or a USRPHC, at any time during the
shorter of the five-year period ending on the date of the sale
or other disposition and the period such
non-U.S. holder
held our common stock (the shorter period referred to as the
lookback period). In general, we would be a USRPHC
if the fair market value of our U.S. real property
interests, as such term is defined for U.S. federal
income tax purposes, equals or exceeds 50% of the sum of the
fair market value of our worldwide real property interests and
our other assets used or held for use in a trade or business.
The test for determining USRPHC status is applied on certain
specific determination dates and is dependent upon a number of
factors, some of which are beyond our control (including, for
example, fluctuations in the value of our assets).
Based on our estimates of the fair market value of our
U.S. real property interests, we believe that, as of
December 31, 2007, less than 50% of our assets constituted
U.S. real property interests and accordingly we were not a
USRPHC. But because of unsettled economic conditions, severe
volatility and declines in the financial markets and resulting
significant uncertainty regarding the value of our assets, we
are unable to determine at the present time whether or not we
were a USRPHC as of December 31, 2008. Moreover, it is not
possible to predict our USRPHC status for the future. Regardless
of any determination we make as to our USRPHC status, the
Internal Revenue Service may not agree with such determination.
If we are or become a USRPHC, so long as our common stock is
regularly traded on an established securities market such as the
New York Stock Exchange (NYSE), only a
non-U.S. holder
who, actually or constructively, holds or held during the
lookback period more than 5% of our common stock will be subject
to U.S. federal income tax on the disposition of our common
stock.
The
costs, scope and timelines of our refining projects may deviate
significantly from our original plans and
estimates.
We may experience unanticipated increases in the cost, scope and
completion time for our improvement, maintenance and repair
projects at our Tyler refinery. Our refinery projects are
generally initiated to increase the yields of higher-value
products, increase our ability to process lower cost crude oils,
increase production capacity, meet new regulatory requirements
or maintain the operations of our existing assets. Equipment
that we require to complete these projects may be unavailable to
us at expected costs or within expected time periods.
Additionally, employee or contractor labor expense may exceed
our expectations. Due to these or other factors beyond our
control, we may be unable to complete these projects within
anticipated cost parameters and timelines. In addition, the
benefits we realize from completed projects may take longer to
achieve
and/or be
less than we anticipated. Our
30
inability to complete
and/or
realize the benefits of our refinery projects in a timely manner
could have a material adverse effect on our business, financial
condition and results of operations.
If we
lose any of our key personnel, our ability to manage our
business and continue our growth could be negatively
impacted.
Our future performance depends to a significant degree upon the
continued contributions of our senior management team and key
technical personnel. We do not currently maintain key person
life insurance policies, non-compete agreements or employment
agreements with the majority of our senior management team. The
loss or unavailability to us of any member of our senior
management team or a key technical employee could significantly
harm us. We face competition for these professionals from our
competitors, our customers and other companies operating in our
industry. To the extent that the services of members of our
senior management team and key technical personnel would be
unavailable to us for any reason, we would be required to hire
other personnel to manage and operate our company and to develop
our products and technology. We cannot assure you that we would
be able to locate or employ such qualified personnel on
acceptable terms or at all.
Litigation
and/or negative publicity concerning food quality, health and
other related issues could result in significant liabilities or
litigation costs and cause consumers to avoid our convenience
stores.
Negative publicity, regardless of whether the concerns are
valid, concerning food quality, food safety or other health
concerns, facilities, employee relations or other matters
related to our operations may materially adversely affect demand
for food offered in our convenience stores and could result in a
decrease in customer traffic to our stores. Additionally, we may
be the subject of complaints or litigation arising from
food-related illness or injury in general which could have a
negative impact on our business.
It is critical to our reputation that we maintain a consistent
level of high quality food in our stores. Health concerns, poor
food quality or operating issues stemming from one store or a
limited number of stores can materially adversely affect the
operating results of some or all of our stores and harm our
proprietary brands.
Risks
Related to Our Common Stock
The
price of our common stock may fluctuate significantly, and you
could lose all or part of your investment.
The market price of our common stock may be influenced by many
factors, some of which are beyond our control, including:
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|
our quarterly or annual earnings or those of other companies in
our industry;
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|
announcements by us or our competitors of significant contracts
or acquisitions;
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changes in accounting standards, policies, guidance,
interpretations or principles;
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general economic and stock market conditions;
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|
the failure of securities analysts to cover our common stock or
changes in financial estimates by analysts;
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future sales of our common stock; and
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|
the other factors described in these Risk Factors.
|
In recent years, the stock market has experienced extreme price
and volume fluctuations. This volatility has had a significant
impact on the market price of securities issued by many
companies, including companies in our industry. The changes
often occur without any apparent regard to the operating
performance of these companies. The price of our common stock
could fluctuate based upon factors that have little or nothing
to do with our company, and these fluctuations could materially
reduce our stock price. In addition, the recent distress in the
credit and financial markets has resulted in extreme volatility
in trading prices of securities and diminished liquidity, and we
cannot assure you that our liquidity will not be affected by
changes in the financial markets and the global economy.
31
In the past, some companies that have had volatile market prices
for their securities have been subject to securities class
action suits filed against them. The filing of a lawsuit against
us, regardless of the outcome, could have a material adverse
effect on our business, financial condition and results of
operations, as it could result in substantial legal costs and a
diversion of our managements attention and resources.
You
may suffer substantial dilution.
We may sell securities in the public or private equity markets
if and when conditions are favorable, even if we do not have an
immediate need for capital. In addition, if we have an immediate
need for capital, we may sell securities in the public or
private equity markets even when conditions are not otherwise
favorable. You will suffer dilution if we issue currently
unissued shares of our stock in the future in furtherance of our
growth strategy. You will also suffer dilution if stock,
restricted stock units, restricted stock, stock options,
warrants or other equity awards, whether currently outstanding
or subsequently granted, are exercised.
We are
a controlled company within the meaning of the NYSE
rules and, as a result, we qualify for, and intend to rely on,
exemptions from certain corporate governance
requirements.
A company of which more than 50% of the voting power is held by
an individual, a group or another company is a controlled
company and may elect not to comply with certain corporate
governance requirements of the NYSE, including:
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the requirement that a majority of its board of directors
consist of independent directors;
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the requirement to have a nominating/corporate governance
committee consisting entirely of independent directors with a
written charter addressing the committees purpose and
responsibilities; and
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the requirement to have a compensation committee consisting
entirely of independent directors with a written charter
addressing the committees purpose and responsibilities.
|
We utilize all of these exemptions. Accordingly, you will not
have the same protections afforded to stockholders of companies
that are subject to all of the corporate governance requirements
of the NYSE.
Our
controlling stockholder may have conflicts of interest with
other stockholders in the future.
At December 31, 2008, Delek Group beneficially owned
approximately 73.4% of our outstanding common stock. As a
result, Delek Group and its controlling shareholder,
Mr. Sharon, will continue to be able to control the
election of our directors, influence our corporate and
management policies (including the declaration of dividends) and
determine, without the consent of our other stockholders, the
outcome of any corporate transaction or other matter submitted
to our stockholders for approval, including potential mergers or
acquisitions, asset sales and other significant corporate
transactions. So long as Delek Group continues to own a
significant amount of the outstanding shares of our common
stock, Delek Group will continue to be able to influence or
effectively control our decisions, including whether to pursue
or consummate potential mergers or acquisitions, asset sales,
and other significant corporate transactions. We cannot assure
you that the interests of Delek Group will coincide with the
interests of other holders of our common stock.
Future
sales of currently unregistered shares of our common stock could
depress the price of our common stock.
The market price of our common stock could decline as a result
of the introduction of a large number of currently unregistered
shares of our common stock into the market or the perception
that these sales could occur. These sales, or the possibility
that these sales may occur, also might make it more difficult
for us to sell equity securities in the future at a time and at
a price that we deem appropriate. At December 31, 2008,
39,389,869 unregistered shares of our shares of common stock
were controlled by Delek Group. Pursuant to a registration
rights agreement with us, Delek Group may register some or all
of these shares under the Securities Act, subject to specified
limitations. The registration rights we granted to Delek Group
apply to all shares of our common stock owned by Delek Group and
entities it controls. In addition, as of December 31, 2008,
Morgan Stanley Capital Group, Inc. owned 1,916,667 unregistered
shares of our common stock that are freely tradable.
32
We
depend upon our subsidiaries for cash to meet our obligations
and pay any dividends.
We are a holding company. Our subsidiaries conduct substantially
all of our operations and own substantially all of our assets.
Consequently, our cash flow and our ability to meet our
obligations or pay dividends to our stockholders depend upon the
cash flow of our subsidiaries and the payment of funds by our
subsidiaries to us in the form of dividends, tax sharing
payments or otherwise. Our subsidiaries ability to make
any payments will depend on many factors, including their
earnings, cash flows, the terms of their indebtedness, tax
considerations and legal restrictions.
We may
be unable to pay future dividends in the anticipated amounts and
frequency set forth herein.
We will only be able to pay dividends from our available cash on
hand and funds received from our subsidiaries. Our ability to
receive dividends from our subsidiaries is restricted under the
terms of their senior secured credit facilities. The declaration
of future dividends on our common stock will be at the
discretion of our board of directors and will depend upon many
factors, including our results of operations, financial
condition, earnings, capital requirements, restrictions in our
debt agreements and legal requirements. Although we currently
intend to pay quarterly cash dividends on our common stock at an
annual rate of $0.15 per share, we cannot assure you that any
dividends will be paid in the anticipated amounts and frequency
set forth herein, if at all.
Provisions
of Delaware law and our organizational documents may discourage
takeovers and business combinations that our stockholders may
consider in their best interests, which could negatively affect
our stock price.
In addition to the fact that Delek Group owns the majority of
our common stock, provisions of Delaware law and our amended and
restated certificate of incorporation and amended and restated
bylaws may have the effect of delaying or preventing a change in
control of our company or deterring tender offers for our common
stock that other stockholders may consider in their best
interests.
Our certificate of incorporation authorizes us to issue up to
10,000,000 shares of preferred stock in one or more
different series with terms to be fixed by our board of
directors. Stockholder approval is not necessary to issue
preferred stock in this manner. Issuance of these shares of
preferred stock could have the effect of making it more
difficult and more expensive for a person or group to acquire
control of us and could effectively be used as an anti-takeover
device. On the date of this report, no shares of our preferred
stock are outstanding.
Our bylaws provide for an advance notice procedure for
stockholders to nominate director candidates for election or to
bring business before an annual meeting of stockholders and
require that special meetings of stockholders be called only by
our chairman of the board, president or secretary after written
request of a majority of our board of directors.
The anti-takeover provisions of Delaware law and provisions in
our organizational documents may prevent our stockholders from
receiving the benefit from any premium to the market price of
our common stock offered by a bidder in a takeover context. Even
in the absence of a takeover attempt, the existence of these
provisions may adversely affect the prevailing market price of
our common stock if they are viewed as discouraging takeover
attempts in the future.
We are
exposed to risks relating to evaluations of internal controls
required by Section 404 of the Sarbanes-Oxley Act of
2002.
To comply with the management certification and auditor
attestation requirements of Section 404 of the
Sarbanes-Oxley Act of 2002 (Section 404), we
are required to evaluate our internal controls systems to allow
management to report on, and our independent auditors to audit,
our internal controls over financial reporting. During this
process, we may identify control deficiencies of varying degrees
of severity under applicable SEC and Public Company Accounting
Oversight Board rules and regulations that remain unremediated.
As a public company, we are required to report, among other
things, control deficiencies that constitute a material
weakness or changes in internal controls that, or are
reasonably likely to, materially affect internal controls over
financial reporting. A material weakness is a
deficiency, or combination of deficiencies, in internal control
over financial
33
reporting, such that there is a reasonable possibility that a
material misstatement of the companys annual or interim
financial statements will not be prevented or detected on a
timely basis.
If we fail to comply with the requirements of Section 404,
we may be subject to sanctions or investigation by regulatory
authorities such as the SEC or the NYSE. Additionally, failure
to comply with Section 404 or the report by us of a
material weakness may cause investors to lose confidence in our
financial statements and our stock price may be adversely
affected. If we fail to remedy any material weakness, our
financial statements may be inaccurate, we may face restricted
access to the capital markets, and our stock price may decline.
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ITEM 1B.
|
UNRESOLVED
STAFF COMMENTS
|
None.
We own a refinery in Tyler, Texas, which is used by our refining
segment and is situated on approximately 100 out of a total of
approximately 600 acres of land owned by us, along with an
associated crude oil pipeline and light products loading
facilities. Much of our pipeline system runs across leased land
and rights-of-way. In 2008, we purchased five additional vacant
or undeveloped properties totaling less than ten acres and a
railroad spur of less than two acres adjacent to our property
for additional flexibility and buffer. This additional acreage
is included in the total of approximately 600 acres owned
by us. We also own terminals in San Angelo and Abilene,
Texas, which are used by our marketing segment, along with
114 miles of refined product pipelines and light product
loading facilities.
As of December 31, 2008, we owned the real estate at
282 company operated retail fuel and convenience store
locations, and leased the real property at 200 company
operated stores. In addition to these stores, we own or lease 17
locations that were either leased or subleased to third party
dealers; 38 other dealer sites are owned or leased independently
by dealers.
The following table summarizes the real estate position of our
retail segment.
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|
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|
|
|
|
|
|
|
|
Number of
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|
|
|
|
|
|
|
|
|
|
|
Company
|
|
|
|
|
|
|
|
Remaining
|
|
Remaining
|
|
|
Operated
|
|
Number of
|
|
Number of
|
|
Number of
|
|
Lease Term
|
|
Lease Term
|
State
|
|
Sites
|
|
Dealer Sites(1)
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|
Owned Sites
|
|
Leased Sites
|
|
<
3 Years(2)
|
|
>
3 Years(2)
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|
Tennessee
|
|
|
263
|
|
|
|
9
|
|
|
|
156
|
|
|
|
112
|
|
|
|
1
|
|
|
|
111
|
|
Alabama
|
|
|
94
|
|
|
|
40
|
|
|
|
62
|
|
|
|
41
|
|
|
|
27
|
|
|
|
14
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|
Georgia
|
|
|
81
|
|
|
|
4
|
|
|
|
46
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|
|
|
38
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|
|
|
|
|
|
|
38
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|
Virginia(3)
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|
|
24
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|
|
|
|
|
|
|
14
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|
|
|
10
|
|
|
|
|
|
|
|
10
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|
Arkansas
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|
|
13
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|
|
|
|
|
|
|
9
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|
|
|
4
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|
|
|
|
|
|
|
4
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|
Kentucky
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|
|
3
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|
|
|
|
|
|
|
1
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|
|
|
2
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|
|
|
|
|
|
|
2
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|
Louisiana
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|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
2
|
|
|
|
|
|
|
|
2
|
|
Mississippi
|
|
|
2
|
|
|
|
|
|
|
|
2
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|
|
|
|
|
|
|
|
|
|
|
|
|
Florida
|
|
|
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
482
|
|
|
|
55
|
|
|
|
290
|
|
|
|
209
|
|
|
|
28
|
|
|
|
181
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
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(1) |
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Includes 38 sites neither owned by nor subleased by us. |
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(2) |
|
Includes renewal options; measured as of December 31, 2008. |
|
(3) |
|
The stores located in Virginia have been reclassified to assets
held for sale as of December 31, 2008. |
Most of our retail fuel and convenience store leases are net
leases requiring us to pay taxes, insurance and maintenance
costs. Of the leases that expire in less than three years, we
anticipate that we will be able to negotiate acceptable
extensions of the leases for those locations that we intend to
continue operating. We believe that none of these leases are
individually material.
34
We lease our corporate headquarters at 7102 Commerce Way,
Brentwood, Tennessee. The lease is for 54,000 square feet
of office space of which we occupy 34,000 square feet and
sub-lease the remaining space. The lease term expires in April
2022.
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ITEM 3.
|
LEGAL
PROCEEDINGS
|
In the ordinary conduct of our business, we are from time to
time subject to lawsuits, investigations and claims, including,
environmental claims and employee related matters. In addition,
OSHA is conducting an investigation concerning the explosion and
fire that occurred at the Tyler refinery on November 20,
2008. Although we cannot predict with certainty the ultimate
resolution of lawsuits, investigations and claims asserted
against us, including civil penalties or other enforcement
actions, we do not believe that any currently pending legal
proceeding or proceedings to which we are a party will have a
material adverse effect on our business, financial condition or
results of operations.
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ITEM 4.
|
SUBMISSION
OF MATTERS TO A VOTE OF SECURITY HOLDERS
|
None.
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ITEM 5.
|
MARKET
FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASE OF EQUITY SECURITIES
|
Market
Information and Dividends
Our common stock is traded on the New York Stock Exchange under
the symbol DK. The following table sets forth the
quarterly high and low sales prices of our common stock for each
quarterly period and dividends issued since January 1, 2007:
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Regular Dividends
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Special Dividends
|
Period
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High Sales Price
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Low Sales Price
|
|
Per Common Share
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|
Per Common Share
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|
2007
|
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|
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First Quarter
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|
$
|
19.28
|
|
|
$
|
14.82
|
|
|
$
|
0.0375
|
|
|
|
None
|
|
Second Quarter
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|
$
|
28.49
|
|
|
$
|
18.67
|
|
|
$
|
0.0375
|
|
|
$
|
0.1975
|
|
Third Quarter
|
|
$
|
30.77
|
|
|
$
|
21.35
|
|
|
$
|
0.0375
|
|
|
|
None
|
|
Fourth Quarter
|
|
$
|
26.17
|
|
|
$
|
17.50
|
|
|
$
|
0.0375
|
|
|
$
|
0.1975
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
First Quarter
|
|
$
|
20.47
|
|
|
$
|
12.54
|
|
|
$
|
0.0375
|
|
|
|
None
|
|
Second Quarter
|
|
$
|
14.40
|
|
|
$
|
8.84
|
|
|
$
|
0.0375
|
|
|
|
None
|
|
Third Quarter
|
|
$
|
10.82
|
|
|
$
|
7.28
|
|
|
$
|
0.0375
|
|
|
|
None
|
|
Fourth Quarter
|
|
$
|
9.09
|
|
|
$
|
3.51
|
|
|
$
|
0.0375
|
|
|
|
None
|
|
In connection with our initial public offering in May 2006, our
Board of Directors announced its intention to pay a regular
quarterly cash dividend of $0.0375 per share of our common stock
beginning in the fourth quarter of 2006. The dividends paid in
2008 totaled approximately $8.0 million. We intend to
continue to pay quarterly cash dividends on our common stock at
the same annual rate of $0.15 per share. The declaration and
payment of future dividends to holders of our common stock will
be at the discretion of our Board of Directors and will depend
upon many factors, including our financial condition, earnings,
legal requirements, restrictions in our debt agreements and
other factors our Board of Directors deems relevant. Except as
represented in the table above, we have paid no other cash
dividends on our common stock during the two most recent fiscal
years.
Holders
As of February 24, 2009, there were approximately 13 common
stockholders of record. This number does not include beneficial
owners of our common stock whose stock is held in nominee or
street name accounts through brokers.
Purchases
of Equity Securities by the Issuer and Affiliated
Purchasers
None.
35
Performance
Graph
The following Performance Graph and related information shall
not be deemed soliciting material or to be
filed with the Securities and Exchange Commission,
nor shall such information be incorporated by reference into any
future filing under the Securities Act of 1933 or Securities
Exchange Act of 1934, each as amended, except to the extent that
we specifically incorporate it by reference into such filing.
The following graph and table compare cumulative total returns
for our stockholders since May 4, 2006 (the date of our
initial public offering) to the Standard and Poors 500
Stock Index and a peer group selected by management. The graph
assumes a $100 investment made on May 4, 2006. Each of the
three measures of cumulative total return assumes reinvestment
of dividends. The peer group is comprised of Alon USA Energy,
Inc., Caseys General Stores, Inc., Frontier Oil
Corporation, Holly Corporation, Pantry, Inc., Sunoco, Inc.,
Susser Holdings Corporation, Tesoro Corporation, TravelCenters
of America, LLC, Valero Energy Corporation and Western Refining,
Inc. The stock performance shown on the graph below is not
necessarily indicative of future price performance.
COMPARISON
OF CUMULATIVE TOTAL RETURN
36
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ITEM 6.
|
SELECTED
FINANCIAL DATA
|
The following selected financial data should be read in
conjunction with Item 7, Managements Discussion and
Analysis of Financial Condition and Results of Operations, and
Item 8, Financial Statements and Supplementary Data, of
this Annual Report on
Form 10-K.
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2007(1)
|
|
|
2006(1)(3)(4)
|
|
|
2005(1)(3)(5)
|
|
|
2004(1)(6)
|
|
|
|
(In millions, except share and per share data)
|
|
|
Statement of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail
|
|
$
|
1,777.2
|
|
|
$
|
1,579.6
|
|
|
$
|
1,195.5
|
|
|
$
|
906.9
|
|
|
$
|
700.9
|
|
Refining
|
|
|
2,091.8
|
|
|
|
1,694.3
|
|
|
|
1,598.6
|
|
|
|
930.5
|
|
|
|
|
|
Marketing
|
|
|
745.5
|
|
|
|
626.6
|
|
|
|
221.6
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
0.7
|
|
|
|
0.4
|
|
|
|
0.3
|
|
|
|
0.4
|
|
|
|
0.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net sales
|
|
|
4,615.2
|
|
|
|
3,900.9
|
|
|
|
3,016.0
|
|
|
|
1,837.8
|
|
|
|
701.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods sold
|
|
|
4,210.0
|
|
|
|
3,453.5
|
|
|
|
2,643.7
|
|
|
|
1,559.3
|
|
|
|
593.0
|
|
Operating expenses
|
|
|
233.8
|
|
|
|
207.1
|
|
|
|
162.4
|
|
|
|
119.8
|
|
|
|
67.3
|
|
General and administrative expenses
|
|
|
56.8
|
|
|
|
54.0
|
|
|
|
37.4
|
|
|
|
22.7
|
|
|
|
14.4
|
|
Depreciation and amortization
|
|
|
40.9
|
|
|
|
31.6
|
|
|
|
21.4
|
|
|
|
14.7
|
|
|
|
11.0
|
|
Gain on sales of assets
|
|
|
(6.8
|
)
|
|
|
|
|
|
|
|
|
|
|
(1.6
|
)
|
|
|
(0.9
|
)
|
Unrealized (gain) loss on forward contract hedging activities(7)
|
|
|
|
|
|
|
(0.1
|
)
|
|
|
|
|
|
|
9.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating costs and expenses
|
|
|
4,534.7
|
|
|
|
3,746.1
|
|
|
|
2,864.9
|
|
|
|
1,724.0
|
|
|
|
684.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
80.5
|
|
|
|
154.8
|
|
|
|
151.1
|
|
|
|
113.8
|
|
|
|
16.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
23.7
|
|
|
|
30.6
|
|
|
|
24.2
|
|
|
|
17.4
|
|
|
|
7.1
|
|
Interest income
|
|
|
(2.1
|
)
|
|
|
(9.3
|
)
|
|
|
(7.2
|
)
|
|
|
(2.1
|
)
|
|
|
|
|
Interest expense to related parties
|
|
|
|
|
|
|
|
|
|
|
1.0
|
|
|
|
3.0
|
|
|
|
1.2
|
|
Loss from minority investment(2)
|
|
|
7.9
|
|
|
|
0.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on extinguishment of debt
|
|
|
(1.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss on impairment of goodwill
|
|
|
11.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other expenses, net
|
|
|
1.0
|
|
|
|
2.4
|
|
|
|
0.2
|
|
|
|
2.5
|
|
|
|
0.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-operating expenses, net
|
|
|
40.1
|
|
|
|
24.5
|
|
|
|
18.2
|
|
|
|
20.8
|
|
|
|
9.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before income taxes
|
|
|
40.4
|
|
|
|
130.3
|
|
|
|
132.9
|
|
|
|
93.0
|
|
|
|
7.2
|
|
Income tax expense
|
|
|
17.4
|
|
|
|
34.9
|
|
|
|
42.4
|
|
|
|
32.5
|
|
|
|
2.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
|
23.0
|
|
|
|
95.4
|
|
|
|
90.5
|
|
|
|
60.5
|
|
|
|
4.7
|
|
Income from discontinued operations, net of tax
|
|
|
3.5
|
|
|
|
1.0
|
|
|
|
2.5
|
|
|
|
3.9
|
|
|
|
2.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income before cumulative effect of a change in accounting
policy
|
|
|
26.5
|
|
|
|
96.4
|
|
|
|
93.0
|
|
|
|
64.4
|
|
|
|
7.3
|
|
Cumulative effect of a change in accounting policy
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(0.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
26.5
|
|
|
$
|
96.4
|
|
|
$
|
93.0
|
|
|
$
|
64.1
|
|
|
$
|
7.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
$
|
0.43
|
|
|
$
|
1.83
|
|
|
$
|
1.92
|
|
|
$
|
1.53
|
|
|
$
|
0.12
|
|
Income from discontinued operations
|
|
|
0.07
|
|
|
|
0.02
|
|
|
|
0.06
|
|
|
|
0.11
|
|
|
|
0.07
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share before cumulative effect of a change in
accounting policy
|
|
|
0.50
|
|
|
$
|
1.85
|
|
|
$
|
1.98
|
|
|
$
|
1.64
|
|
|
$
|
0.19
|
|
Cumulative effect of a change in accounting policy
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(0.01
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share
|
|
$
|
0.50
|
|
|
|
1.85
|
|
|
|
1.98
|
|
|
|
1.63
|
|
|
|
0.19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
$
|
0.43
|
|
|
$
|
1.80
|
|
|
$
|
1.89
|
|
|
$
|
1.53
|
|
|
$
|
0.12
|
|
Income from discontinued operations
|
|
|
0.06
|
|
|
|
0.02
|
|
|
|
0.05
|
|
|
|
0.11
|
|
|
|
0.07
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share before cumulative effect of a change
in accounting policy
|
|
|
0.49
|
|
|
$
|
1.82
|
|
|
$
|
1.94
|
|
|
$
|
1.64
|
|
|
$
|
0.19
|
|
Cumulative effect of a change in accounting policy
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(0.01
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share
|
|
$
|
0.49
|
|
|
|
1.82
|
|
|
|
1.94
|
|
|
|
1.63
|
|
|
|
0.19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares, basic
|
|
|
53,675,145
|
|
|
|
52,077,893
|
|
|
|
47,077,369
|
|
|
|
39,389,869
|
|
|
|
39,389,869
|
|
Weighted average shares, diluted
|
|
|
54,401,747
|
|
|
|
52,850,231
|
|
|
|
47,915,962
|
|
|
|
39,389,869
|
|
|
|
39,389,869
|
|
Dividends declared per common share outstanding
|
|
$
|
0.15
|
|
|
$
|
0.54
|
|
|
$
|
0.04
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
37
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(In millions)
|
|
|
Cash Flow Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows provided by operating activities
|
|
$
|
28.3
|
|
|
$
|
179.4
|
|
|
$
|
109.2
|
|
|
$
|
150.5
|
|
|
$
|
24.1
|
|
Cash flows used in investing activities
|
|
|
(39.1
|
)
|
|
|
(221.5
|
)
|
|
|
(250.4
|
)
|
|
|
(164.1
|
)
|
|
|
(26.5
|
)
|
Cash flows (used in) provided by financing activities
|
|
|
(78.9
|
)
|
|
|
45.5
|
|
|
|
180.2
|
|
|
|
54.1
|
|
|
|
5.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (decrease) increase in cash and cash equivalents
|
|
$
|
(89.7
|
)
|
|
$
|
3.4
|
|
|
$
|
39.0
|
|
|
$
|
40.5
|
|
|
$
|
3.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2008
|
|
2007
|
|
2006
|
|
2005
|
|
2004
|
|
|
(In millions)
|
|
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
15.3
|
|
|
$
|
105.0
|
|
|
$
|
101.6
|
|
|
$
|
62.6
|
|
|
$
|
22.1
|
|
Short-term investments
|
|
|
|
|
|
|
44.4
|
|
|
|
73.2
|
|
|
|
26.6
|
|
|
|
|
|
Total current assets
|
|
|
200.6
|
|
|
|
475.3
|
|
|
|
440.2
|
|
|
|
281.9
|
|
|
|
94.8
|
|
Property, plant and equipment, net
|
|
|
581.7
|
|
|
|
520.6
|
|
|
|
398.5
|
|
|
|
244.0
|
|
|
|
162.1
|
|
Total assets
|
|
|
1,017.2
|
|
|
|
1,244.3
|
|
|
|
949.4
|
|
|
|
606.2
|
|
|
|
330.1
|
|
Total current liabilities
|
|
|
176.4
|
|
|
|
305.0
|
|
|
|
230.8
|
|
|
|
175.9
|
|
|
|
72.3
|
|
Total debt, including current maturities
|
|
|
286.0
|
|
|
|
355.2
|
|
|
|
286.6
|
|
|
|
268.8
|
|
|
|
203.3
|
|
Total non-current liabilities
|
|
|
307.0
|
|
|
|
426.8
|
|
|
|
336.3
|
|
|
|
310.5
|
|
|
|
202.1
|
|
Total shareholders equity
|
|
|
533.8
|
|
|
|
512.5
|
|
|
|
382.3
|
|
|
|
119.8
|
|
|
|
55.8
|
|
Total liabilities and shareholders equity
|
|
|
1,017.2
|
|
|
|
1,244.3
|
|
|
|
949.4
|
|
|
|
606.2
|
|
|
|
330.2
|
|
|
|
|
(1) |
|
Operating results for 2007, 2006, 2005 and 2004 have been
restated to reflect the reclassification of the retail
segments Virginia stores to discontinued operations. |
|
(2) |
|
Beginning October 1, 2008, Delek began reporting its
investment in Lion Oil using the cost method of accounting. See
Note 7 of the Consolidated Financial Statements in
Item 8, Financial Statements and Supplementary Data of this
Annual Report on
10-K for
further information. |
|
(3) |
|
Refinery segment operating results reflect certain
reclassifications made to conform prior year balances to current
year financial statement presentation. Sales of intermediate
feedstock sales have been reclassified to net sales which had
previously been presented on a net basis in cost of goods sold.
Certain pipeline expenses previously presented in cost of goods
sold have been reclassified to operating expenses, general and
administrative expenses and depreciation. These
reclassifications had no effect on either net income or
shareholders equity, as previously reported. |
|
(4) |
|
Effective August 1, 2006, marketing operations were
initiated in conjunction with the acquisition of the Pride
assets. |
|
(5) |
|
Effective April 29, 2005, we completed the acquisition of
the Tyler refinery and related assets. We operated the refinery
for 247 days in 2005. The results of operations of the
Tyler refinery and related assets are included in our financial
results from the date of acquisition. |
|
(6) |
|
Effective April 30, 2004, we completed the acquisition of
100% of the outstanding stock of Williamson Oil. The results of
operations of Williamson Oil are included in our financial
results from the date of acquisition. |
|
(7) |
|
To mitigate the risks of changes in the market price of crude
oil and refined petroleum products, we may enter into forward
contracts to fix the purchase price of crude and sales price of
specific refined petroleum products for a predetermined number
of units at a future date. |
38
Segment
Data(1):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of and for the Year Ended December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other and
|
|
|
|
|
|
|
Refining
|
|
|
Retail
|
|
|
Marketing
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
|
(In millions)
|
|
|
Net sales (excluding intercompany marketing fees and sales)
|
|
$
|
2,105.6
|
|
|
$
|
1,777.2
|
|
|
$
|
731.7
|
|
|
$
|
0.7
|
|
|
$
|
4,615.2
|
|
Intercompany marketing fees and sales
|
|
|
(13.8
|
)
|
|
|
|
|
|
|
13.8
|
|
|
|
|
|
|
|
|
|
Cost of goods sold
|
|
|
1,921.3
|
|
|
|
1,575.3
|
|
|
|
721.2
|
|
|
|
(7.8
|
)
|
|
|
4,210.0
|
|
Operating expenses
|
|
|
96.9
|
|
|
|
135.9
|
|
|
|
1.0
|
|
|
|
|
|
|
|
233.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment contribution margin
|
|
$
|
73.6
|
|
|
$
|
66.0
|
|
|
$
|
23.3
|
|
|
$
|
8.5
|
|
|
|
171.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
56.8
|
|
Depreciation and amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
40.9
|
|
Gain on sales of assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
80.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
348.4
|
|
|
$
|
464.8
|
|
|
$
|
55.3
|
|
|
$
|
148.7
|
|
|
$
|
1,017.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital spending (excluding business combinations)
|
|
$
|
82.9
|
|
|
$
|
18.3
|
|
|
$
|
0.9
|
|
|
$
|
|
|
|
$
|
102.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of and for the Year Ended December 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other and
|
|
|
|
|
|
|
Refining(3)
|
|
|
Retail(2)
|
|
|
Marketing
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
|
(In millions)
|
|
|
Net sales (excluding intercompany marketing fees and sales)
|
|
$
|
1,709.0
|
|
|
$
|
1,579.6
|
|
|
$
|
611.9
|
|
|
$
|
0.4
|
|
|
$
|
3,900.9
|
|
Intercompany marketing fees and sales
|
|
|
(14.7
|
)
|
|
|
|
|
|
|
14.7
|
|
|
|
|
|
|
|
|
|
Cost of goods sold
|
|
|
1,460.2
|
|
|
|
1,396.4
|
|
|
|
596.9
|
|
|
|
|
|
|
|
3,453.5
|
|
Operating expenses
|
|
|
82.2
|
|
|
|
123.4
|
|
|
|
1.0
|
|
|
|
0.5
|
|
|
|
207.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment contribution margin
|
|
$
|
151.9
|
|
|
$
|
59.8
|
|
|
$
|
28.7
|
|
|
$
|
(0.1
|
)
|
|
|
240.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
54.0
|
|
Depreciation and amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31.6
|
|
Gain on forward contract activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(0.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
154.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
380.9
|
|
|
$
|
517.9
|
|
|
$
|
93.5
|
|
|
$
|
252.0
|
|
|
$
|
1,244.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital spending (excluding business combinations)
|
|
$
|
61.6
|
|
|
$
|
23.0
|
|
|
$
|
0.3
|
|
|
$
|
2.0
|
|
|
$
|
86.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
39
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of and for the Year Ended December 31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other and
|
|
|
|
|
|
|
Refining(3)
|
|
|
Retail(2)
|
|
|
Marketing(4)
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
|
(In millions)
|
|
|
Net sales (excluding intercompany marketing fees and sales)
|
|
$
|
1,601.8
|
|
|
$
|
1,195.5
|
|
|
$
|
218.2
|
|
|
$
|
0.5
|
|
|
$
|
3,016.0
|
|
Intercompany marketing fees and sales
|
|
|
(3.2
|
)
|
|
|
(0.2
|
)
|
|
|
3.4
|
|
|
|
|
|
|
|
|
|
Cost of goods sold
|
|
|
1,373.5
|
|
|
|
1,054.2
|
|
|
|
216.0
|
|
|
|
|
|
|
|
2,643.7
|
|
Operating expenses
|
|
|
71.9
|
|
|
|
89.7
|
|
|
|
0.3
|
|
|
|
0.5
|
|
|
|
162.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment contribution margin
|
|
$
|
153.2
|
|
|
$
|
51.4
|
|
|
$
|
5.3
|
|
|
$
|
|
|
|
|
209.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
37.4
|
|
Depreciation and amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21.4
|
|
Operating income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
151.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
332.4
|
|
|
$
|
428.4
|
|
|
$
|
92.4
|
|
|
$
|
96.2
|
|
|
$
|
949.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital spending (excluding business combinations)
|
|
$
|
74.9
|
|
|
$
|
21.4
|
|
|
$
|
0.2
|
|
|
$
|
|
|
|
$
|
96.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Statement of Financial Accounting Standards No. 131,
Disclosures About Segments of an Enterprise and Related
Information, requires disclosure of a measure of segment
profit or loss. We measure the operating performance of each
segment based on segment contribution margin. We define segment
contribution margin as net sales less cost of goods sold and
operating expenses, excluding depreciation and amortization. |
|
|
|
For the retail segment, cost of goods sold comprises the costs
of specific products sold. Operating expenses include costs such
as wages of employees at the stores, lease expense for the
stores, utility expense for the stores and other costs of
operating the stores, excluding depreciation and amortization. |
|
|
|
For the refining segment, cost of goods sold includes all the
costs of crude oil, feedstocks and external costs. Operating
expenses include the costs associated with the actual operations
of the refinery, excluding depreciation and amortization. |
|
|
|
For the marketing segment, cost of goods sold includes all costs
of refined products, additives and related transportation.
Operating expenses include the costs associated with the actual
operation of owned terminals, excluding depreciation and
amortization, terminaling expense at third-party locations and
pipeline maintenance costs. |
|
(2) |
|
Retail operating results for 2007 and 2006 have been restated to
reflect the reclassification of Virginia stores to discontinued
operations. |
|
(3) |
|
Refinery segment operating results reflect certain
reclassifications made to conform prior year balances to current
year financial statement presentation. Sales of intermediate
feedstock sales have been reclassified to net sales which had
previously been presented on a net basis in cost of goods sold.
Certain pipeline expenses previously presented in cost of goods
sold have been reclassified to operating expenses, general and
administrative expenses and depreciation. These
reclassifications had no effect on either net income or
shareholders equity, as previously reported. |
|
(4) |
|
Effective August 1, 2006, marketing operations were
initiated in conjunction with the acquisition of the Pride
assets. |
40
|
|
ITEM 7.
|
MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
Managements Discussion and Analysis of Financial Condition
and Results of Operations (MD&A) is
managements analysis of our financial performance and of
significant trends that may affect our future performance. It
should be read in conjunction with the consolidated financial
statements and related notes included in Item 8, Financial
Statements and Supplementary Data, in this Annual Report on
Form 10-K.
Those statements in MD&A that are not historical in nature
should be deemed forward-looking statements that are inherently
uncertain.
Forward-Looking
Statements
This Annual Report contains forward-looking
statements that reflect our current estimates,
expectations and projections about our future results,
performance, prospects and opportunities. Forward-looking
statements include, among other things, the information
concerning our possible future results, business and growth
strategies, financing plans, expectations that regulatory
developments or other matters will not have a material adverse
effect on our business or financial condition, our competitive
position and the effects of competition, the projected growth of
the industry in which we operate, and the benefits and synergies
to be obtained from our completed and any future acquisitions,
and statements of managements goals and objectives, and
other similar expressions concerning matters that are not
historical facts. Words such as may,
will, should, could,
would, predicts, potential,
continue, expects,
anticipates, future,
intends, plans, believes,
estimates, appears, projects
and similar expressions, as well as statements in future tense,
identify forward-looking statements.
Forward-looking statements should not be read as a guarantee of
future performance or results, and will not necessarily be
accurate indications of the times at, or by which, such
performance or results will be achieved. Forward-looking
information is based on information available at the time
and/or
managements good faith belief with respect to future
events, and is subject to risks and uncertainties that could
cause actual performance or results to differ materially from
those expressed in the statements. Important factors that could
cause such differences include, but are not limited to:
|
|
|
|
|
competition;
|
|
|
|
changes in, or the failure to comply with, the extensive
government regulations applicable to our industry segments;
|
|
|
|
decreases in our refining margins or fuel gross profit as a
result of increases in the prices of crude oil, other feedstocks
and refined petroleum products;
|
|
|
|
our ability to execute our strategy of growth through
acquisitions and transactional risks in acquisitions;
|
|
|
|
general economic and business conditions, particularly levels of
spending relating to travel and tourism or conditions affecting
the southeastern United States;
|
|
|
|
dependence on one principal fuel supplier and one wholesaler for
a significant portion of our convenience store merchandise;
|
|
|
|
unanticipated increases in cost or scope of, or significant
delays in the completion of our capital improvement projects;
|
|
|
|
risks and uncertainties with respect to the quantities and costs
of refined petroleum products supplied to our pipelines
and/or held
in our terminals;
|
|
|
|
operating hazards, natural disasters, casualty losses and other
matters beyond our control;
|
|
|
|
increases in our debt levels;
|
|
|
|
restrictive covenants in our debt agreements;
|
|
|
|
seasonality;
|
|
|
|
terrorist attacks;
|
41
|
|
|
|
|
volatility of derivative instruments;
|
|
|
|
potential conflicts of interest between our major stockholder
and other stockholders;
|
|
|
|
other factors discussed under Item 1, Business, and
Item 1A, Risk Factors, of this Annual Report on
Form 10-K
and in our other filings with the SEC.
|
In light of these risks, uncertainties and assumptions, our
actual results of operations and execution of our business
strategy could differ materially from those expressed in, or
implied by, the forward-looking statements, and you should not
place undue reliance upon them. In addition, past financial
and/or
operating performance is not necessarily a reliable indicator of
future performance and you should not use our historical
performance to anticipate results or future period trends. We
can give no assurances that any of the events anticipated by the
forward-looking statements will occur or, if any of them do,
what impact they will have on our results of operations and
financial condition.
Forward-looking statements speak only as of the date the
statements are made. We assume no obligation to update
forward-looking statements to reflect actual results, changes in
assumptions or changes in other factors affecting
forward-looking information except to the extent required by
applicable securities laws. If we do update one or more
forward-looking statements, no inference should be drawn that we
will make additional updates with respect thereto or with
respect to other forward-looking statements.
Overview
We are a diversified energy business focused on petroleum
refining, wholesale sales of refined products and retail
marketing. Our business consists of three operating segments:
refining, marketing and retail. Our refining segment operates a
high conversion, moderate complexity independent refinery in
Tyler, Texas, with a design crude distillation capacity of
60,000 barrels per day (bpd), along with an
associated crude oil pipeline and light products loading
facilities. Our marketing segment sells refined products on a
wholesale basis in west Texas through company-owned and
third-party operated terminals. Our retail segment markets
gasoline, diesel, other refined petroleum products and
convenience merchandise through a network of
482 company-operated retail fuel and convenience stores
located in Alabama, Arkansas, Georgia, Kentucky, Louisiana,
Mississippi, Tennessee and Virginia. Of these
482 locations, the 24 stores located in Virginia are
currently classified as held for sale for accounting purposes.
For more information, see Item 1
Business Dispositions of Assets Held For Sale of
this Annual Report on
Form 10-K.
Additionally, we own a minority interest in Lion Oil Company, a
privately-held Arkansas corporation, which operates a
75,000 bpd moderate complexity crude oil refinery located
in El Dorado, Arkansas and other pipeline and product terminals.
The cost to acquire feedstocks and the price of the refined
petroleum products we ultimately sell from our refinery depend
on numerous factors beyond our control, including the supply of,
and demand for, crude oil, gasoline and other refined petroleum
products which, in turn, depend on, among other factors, changes
in domestic and foreign economies, weather conditions such as
hurricanes or tornadoes, domestic and foreign political affairs,
global conflict, production levels, the availability of imports,
the marketing of competitive fuels and government regulation.
Other significant factors that influence our results in the
refining segment include the cost of crude, our primary raw
material, the refinerys operating costs, particularly the
cost of natural gas used for fuel and the cost of electricity,
seasonal factors, refinery utilization rates and planned or
unplanned maintenance activities or turnarounds.
The pricing of our refined petroleum products fluctuate
significantly with movements in both crude oil and refined
petroleum product markets. Both the spread between crude oil and
refined petroleum product prices, and more recently the time lag
between the fluctuations in those prices, affect our earnings.
We compare our per barrel refining operating margin to certain
industry benchmarks, specifically the U.S. Gulf Coast 5-3-2
crack spread. The U.S. Gulf Coast 5-3-2 crack spread
represents the differential between Platts quotations for
3/5 of a barrel of U.S. Gulf Coast Pipeline 87 Octane
Conventional Gasoline and 2/5 of a barrel of U.S. Gulf
Coast Pipeline No. 2 Heating Oil (high sulfur diesel), on
the one hand, and the first month futures price of 5/5 of a
barrel of light sweet crude oil on the New York Mercantile
Exchange, on the other hand.
42
While the increases in the cost of crude oil, are reflected in
the changes of light refined products, the value of heavier
products, such as fuel oil, asphalt and coke, have not moved in
parallel with crude cost. This causes additional pressure on our
refining margins.
These external factors affect our pricing, but on
November 20, 2008, an explosion and fire occurred at our
refinery in Tyler, Texas which halted our production. The
explosion and fire caused damage to both our saturates gas plant
and naphtha hydrotreater and the refinery has not resumed
operations since the explosion.
Refining carries insurance coverage with $1.0 billion in
combined limits to insure property damage and business
interruption, which is likely to cover the bulk of the
reconstruction and business interruption expense during the
transitional recovery period. It is currently anticipated that
the combined costs of reconstruction and business interruption
will be substantially less than the combined limits. We
currently anticipate that the Tyler refinery will resume
operations in May 2009.
The cost to acquire the refined fuel products we sell to our
wholesale customers in our marketing segment and at our
convenience stores in our retail segment depends on numerous
factors beyond our control, including the supply of, and demand
for, crude oil, gasoline and other refined petroleum products
which, in turn, depends on, among other factors, changes in
domestic and foreign economies, weather conditions, domestic and
foreign political affairs, production levels, the availability
of imports, the marketing of competitive fuels and government
regulation. Our retail merchandise sales are driven by
convenience, customer service, competitive pricing and branding.
Motor fuel margin is sales less the delivered cost of fuel and
motor fuel taxes, measured on a cents per gallon basis. Our
motor fuel margins are impacted by local supply, demand,
weather, competitor pricing and product brand.
As part of our overall business strategy, we regularly evaluate
opportunities to expand and complement our business and may at
any time be discussing or negotiating a transaction that, if
consummated, could have a material effect on our business,
financial condition, liquidity or results of operations.
Strategic
Initiatives
We are committed to enhancing shareholder value while
maintaining financial stability and flexibility by continuing to:
|
|
|
|
|
repair, modernize, grow and improve the profitability of our
operations through carefully evaluated capital investments;
|
|
|
|
focus on health, safety and environmental compliance;
|
|
|
|
develop and refine innovative information technology
applications for all business segments;
|
|
|
|
provide value to our customers and employees by delivering a
high level of customer service standards;
|
|
|
|
demonstrate a prudent and scalable capital structure; and
|
|
|
|
pursue acquisition opportunities that strengthen our core
markets and leverage our core competencies.
|
To accomplish the foregoing goals, the following represent
certain significant accomplishments in 2008:
|
|
|
|
|
In January 2008, we began offering
E-10 ethanol
blended gasoline at our Tyler terminal. By the second quarter of
2008, substantially all of the gasoline provided by the terminal
was E-10
product.
|
|
|
|
In June 2008, the refinery placed into operation a
13,000 bpd gasoline hydrotreating unit, which allowed the
refinery to make gasoline which complies with the Tier 2
requirements for sulfur content in gasoline.
|
|
|
|
During 2008, we were able to increase the consumption of sour
crude oil in the refinery. West Texas sour crude comprised
approximately 10.1% of our crude slate for the year.
|
|
|
|
In 2008, we completed project for scanning in merchandise as it
is received in our retail stores and began work on a perpetual
item level inventory project that is expected to be completed in
2009.
|
|
|
|
During 2008, we paid dividends totaling approximately
$8.0 million to our shareholders.
|
43
|
|
|
|
|
Our capital spending in 2008 totaled approximately
$102.1 million including $54.3 for discretionary high
return projects and $37.8 for health, safety and reliability
projects.
|
Market
Trends
Our results of operations are significantly affected by the cost
of commodities. Sudden change in petroleum prices is our primary
source of market risk. Our business model is affected more by
the volatility of petroleum prices than by the cost of the
petroleum that we sell.
We continually experience volatility in the energy markets.
Concerns about the U.S. economy and continued uncertainty
in several oil-producing regions of the world resulted in
increases in the price of crude oil which outpaced product
prices in 2008 and 2007. The average price of crude oil in 2008,
2007 and 2006 was $99.73, $72.44 and $66.27 per barrel,
respectively. The U.S. Gulf Coast 5-3-2 crack spread ranged
from a high of $67.63 per barrel to a low of $(0.67) per barrel
during 2008 and averaged $10.27 per barrel during 2008 compared
to an average of $13.04 in 2007 and $10.16 per barrel in 2006.
We also continue to experience high volatility in the wholesale
cost of fuel. The U.S. Gulf Coast price for unleaded
gasoline ranged from a low of $0.77 per gallon to a high of
$4.75 per gallon in 2008 and averaged $2.49 per gallon in 2008,
which compares to averages of $2.05 per gallon in 2007 and $1.83
per gallon in 2006. If this volatility continues and we are
unable to fully pass our cost increases on to our customers, our
retail fuel margins will decline. Additionally, increases in the
retail price of fuel could result in lower demand for fuel and
reduced customer traffic inside our convenience stores in our
retail segment. This may place downward pressure on in-store
merchandise sales and margins. Finally, the higher cost of fuel
has resulted in higher credit card fees as a percentage of sales
and gross profit. As fuel prices increase, we see increased
usage of credit cards by our customers and pay higher
interchange costs since credit card fees are paid as a
percentage of sales.
The cost of natural gas used for fuel in our Tyler refinery has
also shown historic volatility. Our average cost of natural gas
increased to $8.85 per million British Thermal Units
(MMBTU) in 2008 from $7.12 per million MMBTU in 2007
and $6.89 per MMBTU in 2006.
As part of our overall business strategy, management determines,
based on the market and other factors, whether to maintain,
increase or decrease inventory levels of crude or other
intermediate feedstocks. At the end of 2008, we reduced certain
of our crude and feedstock inventories primarily as a result of
the refinery shutdown resulting from the fire in November 2008.
Factors
Affecting Comparability
The comparability of our results of operations for the year
ended December 31, 2008 compared to the years ended
December 31, 2007 and 2006 was affected by the following
factors:
|
|
|
|
|
The explosion and fire at the Tyler, Texas refinery on
November 20, 2008 shut down operations for the remainder of
2008;
|
|
|
|
completion of the gasoline hydrotreater unit in June 2008,
allowing the refinery to process sourer crudes while still
meeting the specifications for sulfur content in gasoline;
|
|
|
|
continued optimization of the refinery operation in 2008 and
2007 allowed us to run over 5,215 and 4,149 barrels per
day, respectively, of West Texas Sour (WTS) crude
oil resulting in additional margin in 2008 and 2007 on that
lower-priced feedstock, whereas we were not running any WTS
crude oil in 2006;
|
|
|
|
volatile commodity prices in both 2008 and 2007, which have
dramatically impacted sales and costs of sales;
|
|
|
|
the addition of ethanol blending at our refining segment in 2008
and our retail segment in 2007;
|
|
|
|
the completion of several acquisitions in 2006 through 2007
including: the purchase of 43 retail fuel and convenience stores
in Georgia and Tennessee from Fast Petroleum, Inc., in July 2006
(the Fast stores), the commencement of marketing
operations in August 2006 in conjunction with the purchase of
refined petroleum product terminals, seven pipelines and storage
tanks from Pride Companies, L.P. (the Pride assets);
the purchase of 107 retail fuel and convenience stores from
Calfee Company of Dalton, Inc. in April
|
44
|
|
|
|
|
2007 (the Calfee stores); and the purchase from
existing shareholders of a 34.6% minority interest investment in
Lion Oil Company in August and September 2007;
|
|
|
|
|
|
the completion of the distillate desulfurization unit at our
Tyler refinery in 2006 which allowed for accelerated tax
depreciation and generated specific federal tax credits that
significantly reduced our effective income tax rate in 2007;
|
|
|
|
the receipt of approximately $166.9 million in proceeds
from an initial public offering of our stock in May 2006, after
payment of offering expenses and underwriting discounts and
commissions; and
|
|
|
|
repayment of $42.5 million of related party debt in May
2006.
|
Results
of Operations
Consolidated
Results of Operation Comparison of the Year Ended
December 31, 2008 versus the Year Ended December 31,
2007
In the fiscal years ended December 31, 2008 and 2007, we
generated net sales of $4,615.2 million and
$3,900.9 million, respectively. The $714.3 increase in net
sales is primarily attributed to higher sales prices at all
three of our operating segments and the inclusion of a full year
of results from the Calfee stores. This increase was partially
offset by lower sales volume, particularly at the refinery due
to the suspension of operations in the fourth quarter of 2008.
Cost of goods sold was $4,210.0 million in 2008 compared to
$3,453.5 million in 2007, an increase of
$756.5 million or 21.9%. This increase is primarily
attributable to higher costs of crude at the refinery, higher
fuel costs at the retail segment, and the inclusion of a full
year of results from the Calfee stores. This increase is offset
by gains on derivatives of $41.5 million in 2008.
Operating expenses were $233.8 million in 2008 compared to
$207.1 million in 2007, an increase of $26.7 million
or 12.9%. This increase was primarily driven by changes in the
retail segment, including an $8.7 million increase related
to the operation of the Calfee stores for a full year in 2008
and higher credit card and insurance expenses. The refining
segment also experienced higher operating expenses primarily due
to the increase in the usage and price of natural gas.
General and administrative expenses were $56.8 million in
2008 compared to $54.0 million in 2007, an increase of
$2.8 million, or 5.2%. The overall increase was primarily
due to the addition of personnel, professional support and
contractors as a result of the acquisition of the Calfee stores
and an increase in property taxes. We do not allocate general
and administrative expenses to our operating segments.
Depreciation and amortization was $40.9 million in 2008
compared to $31.6 million in 2007. This increase was
primarily due to the completion of several raze and rebuild
projects in the retail segment, the inclusion of a full year of
depreciation expense associated with the Calfee stores acquired
in the second quarter of 2007, and several capital projects that
were placed in service at the refinery in the second quarter of
2008, as well as the accelerated depreciation due to the
rescheduling of our turnaround from late 2009 to the first half
of 2009.
Interest expense was $23.7 million in 2008 compared to
$30.6 million in 2007, a decrease of $6.9 million.
This decrease was due to a decrease in our average borrowing
rates on our variable rate facilities, as well as a decrease in
average loan balances. Interest income was $2.1 million for
2008 compared to $9.3 million for 2007, a decrease of
$7.2 million. This decrease was primarily due to our
reduction in cash, cash equivalents and short-term investments
and lower rates of return in 2008.
Loss from equity method investment was $7.9 million and
$0.8 million in 2008 and 2007, respectively. Our
proportionate share of the loss from the Lion Oil minority
investment was $7.1 million and $0.6 million for 2008
and 2007, respectively. In addition, we had amortization expense
of $0.8 million and $0.2 million for 2008 and 2007,
respectively, related to the fair value differential determined
at the acquisition date of our minority investment. We included
our proportionate share of the operating results of Lion Oil in
our consolidated statements of operations two months in arrears.
Beginning October 1, 2008, Delek began reporting its
investment in Lion Oil
45
using the cost method of accounting. See Note 7 of the
consolidated financial statements in Item 8, Financial
Statements and Supplementary Data, of this Annual Report on
Form 10-K
for further information.
Gain on extinguishment of debt was $1.6 million in 2008 and
relates to a purchase in a participating stake in debt of Delek
US held by Finance, as permitted under the terms of the credit
agreement. At a consolidated level, this purchase resulted in a
gain on debt extinguishment. There was no extinguishment of debt
in 2007.
Goodwill impairment was $11.2 million in 2008 and relates
to the write-off of goodwill associated with our purchase of the
Calfee stores, based on our annual impairment testing performed
in the fourth quarter of 2008. There was no goodwill impairment
necessary in 2007.
Other operating expenses, net, were $1.0 million in 2008
compared to $2.4 million in 2007. In 2008, we recognized a
$1.0 million loss associated with the change in the fair
market value of our interest rate derivatives as compared to a
loss of $2.4 million in 2007.
Income tax expense was $17.4 million in 2008 compared to
$34.9 million in 2007, a decrease of $17.5 million.
This decrease was primarily due to the decrease in net income in
2008 compared to 2007. Our effective tax rate was 43.1% in 2008,
compared to 26.8% in 2007. The increase in the effective tax
rate was primarily due to federal tax credits in 2007 related to
production of ultra low sulfur diesel fuel, and the goodwill
impairment recognized in the fourth quarter of 2008.
Income from discontinued operations was $3.5 million and
$1.0 million in 2008 and 2007, respectively, and relates to
the operations of the Virginia stores sold and held for sale in
as of December 31, 2008.
Consolidated
Results of Operation Comparison of the Year Ended
December 31, 2007 versus the Year Ended December 31,
2006
In the fiscal years ended December 31, 2007 and 2006, we
generated net sales of $3,900.9 million and
$3,016.0 million, respectively. The increase in net sales
was primarily due to an increase of $405.0 million in sales
from the new marketing segment which initiated operations in the
third quarter of 2006. Further contributing to the
$884.9 million increase in net sales, $196.2 million
was due to the Calfee stores acquired in April 2007 and
$87.2 million was due to the Fast stores acquired in July
2006. The remaining increase resulted from higher average sales
prices in both our refining and retail segments, which was
partially offset by lower sales volume at the refinery due to
weather-related power outages, mid-cycle maintenance and
optimization of production during 2007.
Cost of goods sold was $3,453.5 million in 2007 compared to
$2,643.7 million in 2006, an increase of
$809.8 million or 30.6%. Of this total increase,
$380.9 million resulted from the inclusion of the marketing
segment costs, $169.5 million was due to the inclusion of
the Calfee stores acquired and $78.6 million was due to the
inclusion of the Fast stores acquired. The cost of crude oil
increased 9.3% from an average of $72.44 per barrel in 2007
compared to $66.27 per barrel in 2006.
Operating expenses were $207.1 million in 2007 compared to
$162.4 million in 2006, an increase of $44.7 million
or 27.5%. This increase was primarily driven by the retail
segment, including an increase of $21.2 million related to
acquiring the Calfee stores in April 2007 and $6.1 million
related to acquiring the Fast stores in July 2006. The remaining
increase was primarily due to a continuing increase in credit
card expense, resulting from both increased customer usage and
interchange fees. In the refining segment, we incurred
additional costs of $10.4 million primarily for
maintenance-related expenditures, additional environmental
expenses and increased chemical costs. The new marketing segment
also contributed $0.7 million to the increased expenses.
General and administrative expenses were $54.0 million in
2007 compared to $37.4 million in 2006, an increase of
$16.6 million, or 44.4%. The overall increase was primarily
due to the addition of personnel, professional support and
contractors as a result of the acquisition of the Calfee and
Fast stores, the new marketing segment, a $0.9 million
increase in stock compensation expense, a $1.3 million
increase in property taxes and the costs associated with being a
public company, including our efforts related to meeting the
requirement to certify compliance with the internal control
provisions of Sarbanes-Oxley for the fiscal year ended
December 31, 2007. We also incurred additional costs
associated with potential acquisitions which we determined we
will no longer pursue.
46
Depreciation and amortization was $31.6 million in 2007
compared to $21.4 million in 2006. This increase was
primarily due to the inclusion of depreciation expense
associated with the Calfee stores acquired in April 2007 and the
inclusion of a full year of depreciation expense associated with
the new marketing segment initiated in August 2006 and the Fast
stores acquired in July 2006 as well as depreciation expense
associated with several large capital projects in the refining
segment, including the distillate desulfurization unit and the
sulfur recovery unit placed in service at the refinery in
September 2006.
Interest expense was $30.6 million in 2007 compared to
$24.2 million in 2006, an increase of $6.4 million.
This increase was primarily due to increased indebtedness in
connection with the acquisitions of the Calfee and Fast stores
and the
start-up of
the marketing segment. Interest income was $9.3 million in
2007 compared to $7.2 million in 2006, an increase of
$2.1 million. This increase was due primarily to higher
cash and short-term investment balances as a result of the
refinery segments favorable cash flow as well as the
proceeds received from our initial public offering in May 2006.
In addition, we had interest expense of $1.0 million in
2006 with no comparable expense in 2007 which was associated
with related party notes payable that were repaid in connection
with our initial public offering in May 2006.
Loss from equity method investment was $0.8 million in
2007. Our proportionate share of the loss from the Lion Oil
investment was $0.6 million. In addition, we had
amortization expense of $0.2 million, related to the fair
value differential for property, plant and equipment determined
at the acquisition date of our investment. We acquired a 28.4%
ownership interest in August 2007 and purchased an additional
6.2% ownership interest in September 2007 for a combined total
interest of 34.6%.
Other operating expenses, net, were $2.4 million in 2007
compared to $0.2 million in 2006. In 2007, we recognized a
$2.4 million loss associated with the change in the fair
market value of our interest rate derivatives as compared to a
nominal loss of less than $0.1 million in 2006.
Income tax expense was $34.9 million in 2007 compared to
$42.4 million in 2006, a decrease of $7.5 million.
This decrease primarily resulted from approximately
$12.7 million in federal tax credit earned as a result of
our production of ultra low sulfur diesel fuel, which we began
producing in the third quarter of 2006. In 2006, this federal
tax credit was approximately $4.3 million. We also benefit
from federal tax incentives related to our refinery operations
that reduce our effective tax rate from the statutory rate of
35%, including a deduction earned for being a domestic
manufacturer. Deductions related to our qualifying domestic
production activity approximate $6.3 million in 2007
compared to $2.0 million in 2006. These items contributed
to our effective tax rate reducing to 26.8% in 2007 compared to
31.9% in 2006.
Income from discontinued operations was $1.0 million and
$2.5 million in 2007 and 2006 respectively, and relates to
the operations of the Virginia properties held for sale.
Operating
Segments
We review operating results in three reportable segments:
refining, marketing and retail. Our company was initially formed
in May 2001 with the acquisition of 198 retail fuel and
convenience stores from Williams Express, Inc., a subsidiary of
The Williams Companies Inc. The refining segment was created in
April 2005 with the acquisition of the Tyler refinery. Effective
August 1, 2006, we added a third segment, marketing, to
track the activity associated with the sales of refined products
on a wholesale basis.
47
Refining
Segment
The table below sets forth information concerning our refinery
segment operations for 2008, 2007 and 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006(2)
|
|
|
Days operated in period(1)
|
|
|
324
|
|
|
|
365
|
|
|
|
365
|
|
Total sales volume (average barrels per day)(1)
|
|
|
56,609
|
|
|
|
54,282
|
|
|
|
56,074
|
|
Products manufactured (average barrels per day)(1):
|
|
|
|
|
|
|
|
|
|
|
|
|
Gasoline
|
|
|
30,346
|
|
|
|
29,660
|
|
|
|
30,163
|
|
Diesel/jet
|
|
|
20,857
|
|
|
|
20,010
|
|
|
|
21,816
|
|
Petrochemicals, LPG, NGLs
|
|
|
1,963
|
|
|
|
2,142
|
|
|
|
2,280
|
|
Other
|
|
|
2,607
|
|
|
|
2,848
|
|
|
|
2,324
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total production
|
|
|
55,773
|
|
|
|
54,660
|
|
|
|
56,583
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Refinery throughput (average barrels per day)(1):
|
|
|
|
|
|
|
|
|
|
|
|
|
Crude oil
|
|
|
51,683
|
|
|
|
53,860
|
|
|
|
55,998
|
|
Other feedstocks
|
|
|
5,239
|
|
|
|
2,303
|
|
|
|
2,130
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total refinery throughput
|
|
|
56,922
|
|
|
|
56,163
|
|
|
|
58,128
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per barrel of sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
Refining operating margin
|
|
$
|
9.29
|
|
|
$
|
11.82
|
|
|
$
|
11.00
|
|
Refining operating margin excluding intercompany marketing fees
|
|
|
10.05
|
|
|
|
12.56
|
|
|
|
11.16
|
|
Direct cash operating expenses
|
|
|
5.28
|
|
|
|
4.15
|
|
|
|
3.51
|
|
Pricing statistics (average for the period presented)(1):
|
|
|
|
|
|
|
|
|
|
|
|
|
WTI Cushing crude oil (per barrel)
|
|
$
|
106.95
|
|
|
$
|
72.44
|
|
|
$
|
66.27
|
|
U.S. Gulf Coast 5-3-2 crack spread (per barrel)
|
|
|
11.13
|
|
|
|
13.04
|
|
|
|
10.16
|
|
U.S. Gulf Coast unleaded gasoline (per gallon)
|
|
|
2.69
|
|
|
|
2.05
|
|
|
|
1.83
|
|
Low sulfur diesel (per gallon)
|
|
|
3.08
|
|
|
|
2.11
|
|
|
|
2.00
|
|
Ultra low sulfur diesel (per gallon)
|
|
|
3.11
|
|
|
|
2.14
|
|
|
|
|
|
Natural gas (per MMBTU)
|
|
|
9.22
|
|
|
|
7.12
|
|
|
|
6.89
|
|
|
|
|
(1) |
|
The refinery has not operated since the November 20, 2008
explosion and fire. This information has been calculated based
on the 324 days that the refinery was operational. |
|
(2) |
|
Refinery segment operating results for 2006 reflect certain
reclassifications made to conform prior balances to current
financial statement presentation. Sales of intermediate
feedstock sales have been reclassified to net sales which had
previously been presented on a net basis in cost of goods sold.
Certain pipeline expenses previously presented in cost of goods
sold have been reclassified to operating expenses, general and
administrative expenses and depreciation. These
reclassifications had no effect on either net income or
shareholders equity, as previously reported. |
Refining
Segment Operational Comparison of the Year Ended
December 31, 2008 versus the Year Ended December 31,
2007
In the fiscal years ended December 31, 2008 and
2007 net sales for the refining segment were
$2,091.8 million and $1,694.3 million, respectively,
an increase of $397.5 million, or 23.5%. Total sales volume
for 2008 averaged 56,609 barrels per day compared to
54,282 barrels per day in 2007. The decrease in sales
volume was primarily due to the November 20, 2008 explosion
and fire that led to the suspension of operations at the
refinery for the near term. The average sales price was $114.05
per barrel sold in 2008 compared to $85.52 per barrel sold in
2007. Although
48
the refinerys operations were suspended subsequent to the
November 20, 2008 explosion and fire, nominal amounts of
intermediates and finished products were sold during that period
and are included in net sales.
Cost of goods sold for our refining segment in 2008 was
$1,921.3 million compared to $1,460.2 million in 2007,
an increase of $461.1 million. This cost increase resulted
from the volatile cost of crude in 2008 which ranged from
$145.27 per barrel to $33.87 per barrel, partially offset by the
reduction in sales volume. The average cost per barrel was
$104.75 in 2008 compared to $73.70 per barrel in 2007. This
increase was offset by a $38.8 million gain on derivative
contracts recognized in 2008.
In conjunction with the acquisition of the Pride assets and the
formation of our marketing segment effective August 1,
2006, our refining segment entered into a service agreement with
our marketing segment on October 1, 2006, which among other
things, requires the refining segment to pay service fees based
on the number of gallons sold at the Tyler refinery and to share
with the marketing segment a portion of the marketing margin
achieved in return for providing marketing, sales and customer
services. This service agreement lowered the margin achieved by
our refining segment in 2008 by $0.76 per barrel to $9.29 per
barrel. Without this fee, the refining segment would have
achieved a refining operating margin of $10.05 per barrel in
2008 compared to $12.56 per barrel in 2007. We eliminate this
intercompany fee in consolidation.
Operating expenses were $96.9 million in 2008, or $5.28 per
barrel sold, compared to $82.2 million in 2007, or $4.15
per barrel sold. The increase in operating expense per barrel
sold was due primarily to a $13.8 million increase in
natural gas costs, as a result of increased usage, and higher
natural gas costs in 2008. Although refining operations were
suspended on November 20, 2008, we continued to have fixed
costs, such as salaries, benefits and utilities. During 2008,
these expenses were considered company losses as we remained in
the 45-day
waiting period associated with our business interruption
insurance.
Contribution margin for the refining segment in 2008 was
$73.6 million, or 42.9% of our consolidated contribution
margin.
Refining
Segment Operational Comparison of the Year Ended
December 31, 2007 versus the Year Ended December 31,
2006
In the fiscal years ended December 31, 2007 and 2006, net
sales for the refining segment were $1,694.3 million and
$1,598.6 million, respectively, an increase of
$95.7 million, or 6.0%. Total sales volume for 2007
averaged 54,282 barrels per day compared to
56,074 barrels per day in 2006. Our sales volume was
negatively impacted by weather related power outages in the
summer of 2007 as well as unplanned maintenance interruptions at
the Tyler refinery which caused temporary product outages at the
Tyler terminal. The average sales price was $85.52 per barrel in
2007 compared to $78.11 per barrel in 2006.
Cost of goods sold for our refining segment in 2007 was
$1,460.2 million compared to $1,373.5 million in 2006,
an increase of $86.7 million. This cost increase resulted
from higher crude oil costs, partially offset by the reduction
in sales volume. The average cost per barrel was $73.70 in 2007
compared to $67.11 in 2006.
In conjunction with the acquisition of the Pride assets and the
formation of our marketing segment effective August 1,
2006, our refining segment entered into a service agreement with
our marketing segment on October 1, 2006, which among other
things, requires the refining segment to pay service fees based
on the number of gallons sold at the Tyler refinery and to share
with the marketing segment a portion of the marketing margin
achieved in return for providing marketing, sales and customer
services. This service agreement lowered the margin achieved by
our refining segment in 2007 by $0.74 per barrel to $11.82 per
barrel. Without this fee, the refining segment would have
achieved a refining operating margin of $12.56 per barrel in
2007 compared to $11.16 per barrel in 2006. We eliminate this
intercompany fee in consolidation.
Operating expenses were $82.2 million in 2007, or $4.15 per
barrel sold, compared to $71.9 million in 2006, or $3.51
per barrel sold. The increase in operating expense primarily
resulted from a $4.0 million increase in maintenance costs,
a $3.3 million increase in environmental expenses and a
$1.9 million increase in chemical usage related to
operations, partially offset by the decrease in sales volume of
1,792 average barrels per day and a decrease in utility expense
resulting from more favorable rates in 2007 compared to 2006.
The increase in maintenance costs resulted from unplanned
maintenance events in 2007 including power outages experienced
prior to the
49
commencement of operation of the 138kV power substation and
costs related to the repair of a 300,000 barrel crude oil
tank.
Contribution margin for the refining segment in 2007 was
$151.9 million, or 63.2% of our consolidated contribution
margin.
Marketing
Segment
We initiated operations in our marketing segment effective
August 1, 2006 with the acquisition of the Pride assets. In
this segment, we sell refined products on a wholesale basis in
west Texas through company-owned and third-party operated
terminals.
The table below sets forth certain information concerning our
marketing segment for the full years ended December 31,
2008 and 2007 and for the period since its formation on
August 1, 2006 through December 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Period
|
|
|
|
|
|
|
|
|
|
August 1, 2006
|
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
Through
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Days operated in period
|
|
|
366
|
|
|
|
365
|
|
|
|
153
|
|
Total sales volume (average barrels per day)
|
|
|
16,557
|
|
|
|
17,923
|
|
|
|
17,758
|
|
Products sold (average barrels per day):
|
|
|
|
|
|
|
|
|
|
|
|
|
Gasoline
|
|
|
7,980
|
|
|
|
8,166
|
|
|
|
8,129
|
|
Diesel/jet
|
|
|
8,517
|
|
|
|
9,651
|
|
|
|
9,568
|
|
Other
|
|
|
60
|
|
|
|
106
|
|
|
|
61
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total sales
|
|
|
16,557
|
|
|
|
17,923
|
|
|
|
17,758
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct operating expenses (per barrel of sales)
|
|
$
|
0.17
|
|
|
$
|
0.15
|
|
|
$
|
0.12
|
|
Marketing
Segment Operational Comparison of the Year Ended
December 31, 2008 versus the Year Ended December 31,
2007
Net sales for the marketing segment were $745.5 million and
$626.6 million in the years ended December 31, 2008
and 2007, respectively, an increase of $118.9 million or
19.0%. Total sales volume averaged 16,557 barrels per day
in 2008 and 17,923 barrels per day in 2007. Net sales
included $13.8 million of service fees paid by our refining
segment to our marketing segment in 2008 and $14.7 million
paid in 2007. These service fees are based on the number of
gallons sold and a shared portion of the margin achieved in
return for providing marketing, sales and customer support
services.
Cost of goods sold was $721.2 million in 2008, or $119.01
per barrel sold compared to $596.9 million in 2007, or
$91.24 per barrel sold, an increase of $124.3 million or
20.8%. Average gross margin was $4.02 and $4.54 per barrel in
2008 and 2007, respectively. We recognized a gain of
$5.7 million and $0.6 million in 2008 and 2007,
respectively, associated with the settlement of nomination
differences under long-term purchase contracts and finished
grade fuel derivatives.
Operating expenses in the marketing segment were
$1.0 million in 2008 and 2007. These costs primarily relate
to salaries, utilities and insurance costs.
Contribution margin for the marketing segment in 2008 was
$23.3 million, or 13.6% of our consolidated segment
contribution margin.
Marketing
Segment Operational Comparison of the Year Ended
December 31, 2007 versus the Year Ended December 31,
2006
Net sales for the marketing segment were $626.6 million in
2007. Net sales for the marketing segment were
$221.6 million for the period from August 1, 2006
through December 31, 2006. Total sales volume averaged
17,923 barrels per day in 2007 and 17,758 barrels per
day in the 2006 period. Net sales included $14.7 million of
50
service fees paid by our refining segment to our marketing
segment in 2007 and $3.4 million paid during the 2006
period. These service fees are based on the number of gallons
sold and a shared portion of the margin achieved in return for
providing marketing, sales and customer support services.
Cost of goods sold was $596.9 million in 2007, or $91.24
per barrel sold of $91.24. Cost of goods sold was
$216.0 million in the 2006 period, or $79.49 per barrel
sold. Average gross margin was $4.54 and $2.06 per barrel in
2007 and the 2006 period, respectively. We recognized a gain in
2007 of $0.6 million and a loss of $1.3 million in the
2006 period associated with the settlement of nomination
differences under long-term purchase contracts. In the 2006
period, we also incurred a loss of $2.7 million associated
with the purchase of initial inventory which required payment at
a spot price rather than more favorable terms under our
long-term purchase contracts, and which then had an immediate
drop in market value prior to the ultimate sale of such
inventory.
Operating expenses in the marketing segment were $1.0 in 2007
and $0.3 million in 2006. These costs primarily relate to
salaries, utilities and insurance costs.
Contribution margin for the marketing segment in 2007 was
$28.7 million, or 11.9% of our consolidated segment
contribution margin.
Retail
Segment
The table below sets forth information concerning our retail
segment continuing operations for the last three years:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2008
|
|
2007
|
|
2006
|
|
Number of stores (end of period)
|
|
|
458
|
|
|
|
461
|
|
|
|
358
|
|
Average number of stores
|
|
|
458
|
|
|
|
434
|
|
|
|
333
|
|
Retail fuel sales (thousands of gallons)
|
|
|
407,597
|
|
|
|
412,052
|
|
|
|
329,311
|
|
Average retail gallons per average number of stores
(in thousands)
|
|
|
891
|
|
|
|
950
|
|
|
|
989
|
|
Retail fuel margin ($ per gallon)
|
|
$
|
0.197
|
|
|
$
|
0.147
|
|
|
$
|
0.147
|
|
Merchandise sales (in millions)
|
|
$
|
376.1
|
|
|
$
|
381.1
|
|
|
$
|
300.0
|
|
Merchandise margin %
|
|
|
31.5
|
%
|
|
|
31.6
|
%
|
|
|
30.3
|
%
|
Credit expense (% of gross margin)
|
|
|
8.8
|
%
|
|
|
8.3
|
%
|
|
|
7.2
|
%
|
Merchandise and cash over/short (% of net sales)
|
|
|
0.2
|
%
|
|
|
0.3
|
%
|
|
|
0.3
|
%
|
Operating expenses/merchandise sales plus total gallons
|
|
|
16.7
|
%
|
|
|
15.0
|
%
|
|
|
13.6
|
%
|
Retail
Segment Operational Comparison of the Year Ended
December 31, 2008 versus the Year Ended December 31,
2007
In the fiscal years ended December 31, 2008 and 2007, net
sales for our retail segment were $1,777.2 million and
$1,579.6 million, respectively, an increase of
$197.6 million or 12.5%. Retail fuel sales, including
wholesale dollars, increased 16.9% to $1,401.2 million in
2008. Merchandise sales decreased 1.3% to $376.1 million in
2008.
Retail fuel sales were 407.6 million gallons in 2008
compared to 412.1 million gallons in 2007. This decrease
was primarily due to a decrease of 5.6% in comparable store
gallons for 2008 compared to 2007. The decrease was partially
offset by the full year results from the purchased Calfee
stores, which increased fuel gallons sold by 18.0 million
gallons. Retail fuel sales price increased 18.1%, or $0.49 per
gallon, to an average price of $3.20 per gallon in 2008 from an
average price of $2.71 per gallon in 2007.
The decrease in merchandise sales was primarily due to a
decrease in comparable store merchandise sales of 6.7%,
primarily due to decreases in our soft drink and general
merchandise categories. This decrease was partially offset by
the $17.9 million increase in merchandise sales resulting
from the inclusion of a full year of merchandise sales from the
Calfee stores.
51
We continue to develop our private label product offerings which
currently include water, soft drinks, generic cigarettes, motor
oil, automatic transmission fluid and bag candy. In 2008,
private label merchandise sales represented 2.9% of total retail
segment merchandise sales compared to 3.0% of total retail
segment merchandise sales in 2007. Private label water
represented 35.5% of the water subcategory, private label soda
represented 2.8% of the soft drink category, automotive products
represented 32.5% of the automotive subcategory and candy
represented 4.6% of the candy category in 2008.
Cost of goods sold for our retail segment increased 12.8% to
$1,575.3 million in 2008 from $1,396.4 million in
2007. This increase was primarily due to the inclusion of a full
year of results from the Calfee stores acquired which increased
cost of goods sold by 5.8%, and an increase in the average cost
of fuel of $0.44 per gallon, to $3.00 per gallon in 2008, as
compared to $2.56 per gallon in 2007.
Operating expenses were $135.9 million in 2008, an increase
of $12.5 million, or 10.1%. This increase was primarily due
to $8.7 million operating costs from the inclusion of a
full year of results from the Calfee stores, and higher utility,
maintenance, credit card and insurance expenses at our existing
stores, which were partially offset by a decrease in other
expenses. The ratio of operating expenses to merchandise sales
plus total gallons sold in our retail operations increased to
16.7% in 2008 from 15.0% in 2007.
Contribution margin for the retail segment in 2008 was
$66.0 million, or 38.5% of our consolidated contribution
margin.
Retail
Segment Operational Comparison of the Year Ended
December 31, 2007 versus the Year Ended December 31,
2006
In the fiscal years ended December 31, 2007 and 2006, net
sales for our retail segment were $1,579.6 million and
$1,195.7 million, respectively, an increase of
$383.9 million or 32.1%. Retail fuel sales, including
wholesale dollars, increased 33.8% to $1,198.6 million in
2007. Merchandise sales increased 27.0% to $381.1 million
in 2007.
Retail fuel sales were 412.1 million gallons in 2007
compared to 329.2 million gallons in 2006. The increase in
retail fuel sales was primarily due to the acquisition of the
Calfee stores in May 2007 and the Fast stores in July 2006. The
inclusion of the Calfee and Fast stores increased fuel gallons
sold by 72.8 million. Same store fuel gallons sold
increased 1.7% in 2007 when compared to 2006. Retail fuel sales
price increased 8.8%, or $0.21 per gallon, to an average price
of $2.71 per gallon in 2007 from an average price of $2.49 per
gallon in 2006.
The increase in merchandise sales was primarily due to a
$74.6 million increase in merchandise sales resulting from
the inclusion of the Calfee stores and a full year of
merchandise sales from the Fast stores. Our comparable store
merchandise sales increased by 1.4%.
In 2007, private label merchandise sales represented 3.0% of
total retail segment merchandise sales. Private label water
represented 40.0% of the water subcategory, private label soda
represented 3.1% of the soft drink category, automotive products
represented 29.9% of the automotive subcategory and candy
represented 4.0% of the candy category in 2007. Prior to 2007,
our only private label items were water and generic cigarettes
and our systems only tracked sales by category. While we offered
private label items, we did not track by item within a
subcategory.
Cost of goods sold for our retail segment increased 32.5% to
$1,396.4 million in 2007 from $1,054.2 million in
2006. This increase was primarily due to the inclusion of the
Calfee and Fast stores acquired which increased cost of goods
sold $248.1 million and resulted in a 10.1% increase in
average retail fuel costs.
Operating expenses were $123.4 million in 2007, an increase
of $33.7 million, or 37.6%. This increase was primarily due
to $27.3 million operating costs from the inclusion of the
Calfee and Fast stores, higher utility and maintenance expenses
in our existing stores, as well as a continuing increase in
credit card expense. The ratio of operating expenses to
merchandise sales plus total gallons sold in our retail
operations increased to 15.0% in 2007 from 13.6% in 2006.
Contribution margin for the retail segment in 2007 was
$59.8 million, or 28.1% of our consolidated contribution
margin.
52
Liquidity
and Capital Resources
Our primary sources of liquidity are cash generated from our
operating activities and borrowings under our revolving credit
facilities. In addition, our liquidity was enhanced during the
second quarter of 2006 by the receipt of $166.9 million of
net proceeds from our initial public offering of common stock,
after the payment of underwriting discounts and commissions, and
offering expenses. We believe that our cash flows from
operations and borrowings under our current credit facilities
will be sufficient to satisfy the anticipated cash requirements
associated with our existing operations for at least the next
12 months.
Additional capital may be required in order to consummate
acquisitions, for capital expenditures, or to fund expanded
general operations. We will likely seek these additional funds
from a variety of sources, including public or private debt and
stock offerings, and borrowings under credit lines or other
sources. We continue to monitor the capital markets but there
can be no assurance that we will be able to raise additional
funds on favorable terms or at all.
Cash
Flows
The following table sets forth a summary of our consolidated
cash flows for 2008, 2007 and 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
(In millions)
|
|
|
|
|
|
Cash Flow Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows provided by operating activities
|
|
$
|
28.3
|
|
|
$
|
179.4
|
|
|
$
|
109.3
|
|
Cash flows used in investing activities
|
|
|
(39.1
|
)
|
|
|
(221.5
|
)
|
|
|
(250.5
|
)
|
Cash flows (used in) provided by financing activities
|
|
|
(78.9
|
)
|
|
|
45.5
|
|
|
|
180.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (decrease) increase in cash and cash equivalents
|
|
$
|
(89.7
|
)
|
|
$
|
3.4
|
|
|
$
|
39.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
Flows from Operating Activities
Net cash provided by operating activities was $28.3 for 2008
compared to $179.4 million for 2007 and $109.3 million
for 2006. The decrease in cash flows from operations in 2008
from 2007 was primarily due to decreases in net income and
accounts payable which were partially offset by decreases in
both accounts receivable and inventory. The significant
decreases in payables, receivables and inventory were primarily
the result of the refinery shutdown occurring on
November 20, 2008. Vendor credit terms have provided a
significant working capital benefit which we expect will be
realized again when the refinery resumes operations, which is
expected to be in May 2009.
The increase in cash flows from operations in 2007 from 2006 was
primarily due to a $67.9 million increase in accounts
payable and other current liabilities as well as increased
depreciation and amortization costs resulting from recent
capital spending programs at our Tyler refinery and the
depreciation associated with the purchase of the Calfee stores
completed in the second quarter of 2007.
Cash
Flows from Investing Activities
Net cash used in investing activities was $39.1 million for
2008 compared to $221.5 million for 2007 and
$250.5 million for 2006. The decrease from 2007 to 2008 was
primarily due to the 2007 acquisitions of both the Calfee stores
and the 34.6% equity ownership of Lion Oil. This decrease was
partially offset by the increase in net sales of short-term
investments in 2008.
Cash used in investing activities in 2008 includes our capital
expenditures of approximately $102.1 million, of which
$82.9 million was spent on projects at our refinery,
$0.9 million in our marketing segment and
$18.3 million in our retail segment. During 2008, we spent
$45.4 million on regulatory and maintenance projects at the
refinery. In our retail segment, we spent $6.8 million
completing several raze and rebuild projects.
The decrease from 2006 to 2007 was primarily due to the
$75.0 million net change in purchase and sales activity
associated with our short-term investments and to our
acquisition costs in 2007 compared to 2006. Capital
53
expenditures in 2007 were approximately $87.7 million, of
which $61.6 million was spent on projects at our refinery,
$0.3 million in our marketing segment and
$23.8 million in our retail segment. During 2007, we spent
$38.7 million on regulatory and compliance projects at the
refinery. In our retail segment, we spent $8.6 million
opening three store raze and rebuilds, including two
in our Alabama market, and retrofitting one existing store using
our next generation MAPCO Mart concept. In 2007, we also used
$163.7 million of cash in connection with the
$74.6 million (including transaction costs) acquisition of
the Calfee stores and the $89.1 million (including
transaction costs) cash paid for the acquisition of a 34.6%
equity ownership of Lion Oil.
Cash
Flows from Financing Activities
Net cash used in financing activities was $78.9 million for
2008, compared to cash provided by financing activities of
$45.5 million for 2007 and $180.2 million during 2006.
Net cash used in financing activities in 2008 was primarily due
to the $62.0 million repayment on debt and capital lease
obligations. We also had net repayments on our revolving credit
facilities of $42.2 million. These decreases were partially
offset by the addition of $35.0 million of new notes
payable in 2008.
The decrease in cash provided from financing activities in 2007
as compared to 2006 was primarily due to our having received net
proceeds of $166.9 million in our initial public offering
completed on May 9, 2006, discussed in Note 20 of the
consolidated financial statements in Item 8, Financial
Statements and Supplementary Data of this Annual Report on
Form 10-K.
Net cash provided by financing activities in 2007 was primarily
due to the $65.0 million in proceeds received from the
issuance of debt that funded a portion of the Calfee
acquisition. We also had net proceeds from our revolving credit
facilities of $4.6 million and $7.7 million of
proceeds and tax benefit associated with our stock compensation.
All of these proceeds in 2007 were partially offset by dividend
payments of $28.5 million.
Cash
Position and Indebtedness
As of December 31, 2008, our total cash and cash
equivalents were approximately $15.3 million and we had
total indebtedness of approximately $286.0 million.
Borrowing availability under our four revolving credit
facilities was approximately $164.0 million and we had a
total face value of letters of credit outstanding of
$32.1 million.
A summary of our total third party indebtedness as of
December 31, 2008 is shown below:
|
|
|
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
|
(In millions)
|
|
|
Senior secured credit facility term loan
|
|
$
|
121.2
|
|
Senior secured credit facility revolver
|
|
|
15.8
|
|
Fifth Third revolver
|
|
|
18.8
|
|
Reliant Bank revolver
|
|
|
6.5
|
|
Lehman note
|
|
|
27.7
|
|
Promissory notes
|
|
|
95.0
|
|
Capital lease obligations
|
|
|
1.0
|
|
|
|
|
|
|
|
|
|
286.0
|
|
Less: Current portion of long-term debt, notes payable and
capital lease obligations
|
|
|
83.9
|
|
|
|
|
|
|
Total long-term debt
|
|
$
|
202.1
|
|
|
|
|
|
|
Senior
Secured Credit Facility
The senior secured credit facility consists of a
$120.0 million revolving credit facility and
$165.0 million term loan facility which as of
December 31, 2008, had $15.8 million outstanding under
the revolver and $121.2 million outstanding under the term
loan. As of December 31, 2008, Lehman Commercial Paper Inc.
(LCPI) was the administrative agent and a lender under the
facility. As of the same date, Express had been informed by LCPI
that it would not be funding its pro rata lender participation
of future borrowings under the revolving credit facility. Since
54
the communication of its intention through the date of this
filing, LCPI has not participated in any borrowings by Express
under the revolving credit facility. LCPIs commitment
amount under the revolving credit facility is $12 million.
However, the unavailability of LCPIs pro rata lender
participation in the revolving credit facility has not had and
is not expected to have a material impact on Expresss
liquidity or its operations.
Borrowings under the senior secured credit facility are secured
by substantially all the assets of MAPCO Express, Inc. and its
subsidiaries. Letters of credit outstanding under the facility
totaled $11.7 million as of December 31, 2008. The
senior secured credit facility term loan requires quarterly
principal payments of approximately 0.25% of the principal
balance through March 31, 2011 and a balloon payment of the
remaining principal balance due upon maturity on April 28,
2011. We are also required to make certain prepayments of this
facility depending on excess cash flow as defined in the credit
agreement. In accordance with this excess cash flow calculation,
we prepaid $9.5 million in March 2008 and expect to pay
another $9.8 million in March 2009. In June 2008, Express
sold real property operated by a third party for
$3.9 million. In September 2008, Express sold its leasehold
interest in a location it operated for $4.5 million. The
proceeds of the June sale, net of expenses, were used to pay
down the term loan, while the net proceeds of the September sale
were retained, pursuant to the terms of the facility, for asset
reinvestment purposes. In December 2008, consistent with the
terms of the December 3, 2008 amendment discussed below,
Express disposed of 14 real property assets. The application of
the proceeds from these asset sales, net of any amounts set
aside pursuant to the terms of the facility for reinvestment
purposes, resulted in the prepayment of the term loan facility
in the amount of $9.8 million. The senior secured credit
facility revolver is payable in full upon maturity on
April 28, 2010. The senior secured credit facility term and
senior secured credit facility revolver loans bear interest
based on predetermined pricing grids which allow us to choose
between a Base Rate or Eurodollar rate.
At December 31, 2008, the weighted average borrowing rate
was approximately 3.0% for the senior secured credit facility
term loan and 4.0% for the senior secured credit facility
revolver. Additionally, the senior secured credit facility
requires us to pay a quarterly fee of 0.5% per year on the
average available revolving commitment under the senior secured
credit facility revolver. Amounts available under the senior
secured revolver as of December 31, 2008 were approximately
$80.4 million excluding the commitment of LCPI as a lender
under this facility.
On December 3, 2008, the credit facility was amended to
allow for the disposition of specific Express real and personal
property assets in certain of its geographic operating regions.
The amendment also allows for additional asset sales of up to
$35.0 million per calendar year subject to such sales
meeting certain financial criteria. Additionally, the amendment
appoints Fifth Third Bank, N.A. as the successor administrative
agent subject to the resignation or removal of LCPI.
We are required to comply with certain financial and
non-financial covenants under the senior secured credit
facility. We were in compliance with all covenant requirements
as of December 31, 2008.
SunTrust
ABL Revolver
On October 13, 2006, we amended and restated our existing
asset based revolving credit facility. The amended and restated
agreement, among other things, increased the size of the
facility from $250 to $300 million, including a
$300 million sub-limit for letters of credit, and extended
the maturity of the facility by one year to April 28, 2010.
The revolving credit agreement bears interest based on
predetermined pricing grids that allow us to choose between a
Base Rate or Eurodollar rate.
Availability under the SunTrust ABL revolver is determined by a
borrowing base calculation defined in the credit agreement and
is supported primarily by cash, certain accounts receivable and
inventory.
The SunTrust ABL revolver primarily supports our issuances of
letters of credit used in connection with the purchases of crude
oil for use in our refinery. Such letter of credit usage and any
borrowings under the facility may at no time exceed the
aggregate borrowing capacity available under the SunTrust ABL
revolver. As of December 31, 2008, we had no outstanding
borrowings under the agreement but had letters of credit
outstanding totaling approximately $5.3 million. Borrowing
capacity under the SunTrust ABL revolver, net of an availability
block requirement, as of December 31, 2008 was
$33.4 million.
The SunTrust ABL revolver contains certain customary
non-financial covenants, including a negative covenant that
prohibits us from creating, incurring or assuming any liens,
mortgages, pledges, security interests
55
or other similar arrangements against the property, plant and
equipment of the refinery, subject to customary exceptions for
certain permitted liens.
Effective December 15, 2008 and in light of the temporary
suspension of our refining operations, the SunTrust ABL revolver
was amended to eliminate any need to maintain minimum levels of
borrowing base availability during all times that there are zero
utilizations of credit (i.e., loans or letters of credit
outstanding) under the facility. During times that there are
outstanding utilizations of credit under the facility, in the
event that our availability (net of a $15.0 million
availability block requirement) under the borrowing base is less
than $30.0 million or less than $15.0 million on any
given measurement date we become subject to certain reporting
obligations and certain covenants, respectively. We were in
compliance with all covenant requirements as of
December 31, 2008.
Fifth
Third Revolver
In conjunction with the acquisition of the Pride assets
discussed herein and in Note 4 of our consolidated
financial statements included in Item 8, Financial
Statements and Supplementary Data, of this Annual Report on
Form 10-K,
on July 27, 2006, Delek executed a short-term revolver with
Fifth Third Bank, as administrative agent, in the amount of
$50.0 million. The proceeds of this revolver were used to
fund the working capital needs of the newly formed subsidiary,
Delek Marketing & Supply, LP. The Fifth Third revolver
initially matured on July 30, 2007, but on July 27,
2007 the maturity was extended until January 31, 2008. On
December 19, 2007, we amended and restated our existing
revolving credit facility. The amended and restated agreement,
among other things, increased the size of the facility from
$50.0 to $75.0 million, including a $25.0 million
sub-limit for letters of credit, and extended the maturity of
the facility to December 19, 2012. On October 17,
2008, the agreement was further amended to permit the payment of
a one-time distribution of $20.0 million from the borrower
to Delek US Holdings, Inc., increase the size of the sub-limit
for letters of credit to $35.0 million and reduce the
leverage ratio financial covenant limit.
The revolver bears interest based on predetermined pricing grids
that allow us to choose between a Base Rate or
Eurodollar rate loans. Borrowings under the Fifth
Third revolver are secured by substantially all of the assets of
Delek Marketing & Supply LP. As of December 31,
2008, we had $18.8 million outstanding borrowings under the
facility at a weighted average borrowing rate of 2.6%. We also
had letters of credit outstanding under the facility of
$11.5 million as of December 31, 2008. Amounts
available under the Fifth Third revolver as of December 31,
2008 were approximately $44.7 million. We are required to
comply with certain financial and non-financial covenants under
this revolver. We were in compliance with all covenant
requirements as of December 31, 2008.
Lehman
Credit Agreement
On March 30, 2007, Delek entered into a credit agreement
with Lehman Commercial Paper Inc. (LCPI) as administrative
agent. As of December 31, 2008, LCPI remains the
administrative agent under this facility. The credit agreement
provides for unsecured loans of $65.0 million, the proceeds
of which were used to pay a portion of the acquisition costs for
the assets of Calfee Company of Dalton, Inc. and affiliates, and
to pay related costs and expenses in April 2007. In December
2008, a subsidiary of the borrower, Finance, purchased a
participating stake in the loan outstanding as permitted under
the terms of the agreement. At a consolidated level, this
resulted in a gain of $1.6 million on the extinguishment of
debt. As of December 31, 2008, the amount outstanding to
unrelated parties under the agreement is $27.7 million. The
loans become due on March 30, 2009 and bear interest based
on predetermined pricing grids which allow us to choose between
Base Rate or a Eurodollar rate. As of
December 31, 2008, the weighted average borrowing rate was
5.4%. This agreement was amended in June 2008 to redefine
certain financial covenants required under the agreement. In
December 2008, the agreement was amended further to provide
Delek greater financing and operating flexibility under certain
non-financial covenants in the facility. We are required to
comply with certain financial and non-financial covenants under
this credit agreement. We were in compliance with all covenant
requirements as of December 31, 2008.
Promissory
Notes
On May 23, 2006, Delek executed a $30.0 million
promissory note in favor of Israel Discount Bank of New York
(IDB Note). The proceeds of this note were used to repay the
existing promissory notes in favor of Israel
56
Discount Bank and Bank Leumi USA. On December 30, 2008, the
IDB Note was amended and restated. As amended and restated, the
IDB Note matures on December 31, 2011 and requires
quarterly principal amortization in amounts of
$1.25 million beginning on March 31, 2010, with a
balloon payment of remaining principal amounts due at maturity.
The IDB Note bears interest at the greater of a fixed spread
over 3 month LIBOR or an interest rate floor of 5.0%. As of
December 31, 2008 the weighted average borrowing rate for
amounts borrowed under the IDB Note was 5.0%. We are required to
comply with certain financial and non-financial covenants under
IDB Note. We were in compliance with all covenant requirements
as of December 31, 2008.
On December 30, 2008, Delek executed a second promissory
note in favor of Israel Discount Bank of New York for
$15.0 million. This note matures on December 31, 2009.
The note bears interest at the greater of a fixed spread over
3 month LIBOR or an interest rate floor of 5.0%. As of
December 31, 2008 the weighted average borrowing rate for
amounts borrowed under the note was 5.5%. We are required to
comply with certain financial and non-financial covenants under
the note. We were in compliance with all covenant requirements
as of December 31, 2008.
On July 27, 2006, Delek executed a $30.0 million
promissory note in favor of Bank Leumi USA. The proceeds of this
note were used to fund a portion of the Pride Acquisition and
its working capital needs. This note matures on July 27,
2009, and bears interest, payable for the applicable interest
period, at a fixed spread over the LIBOR rate (Reserve Adjusted)
for interest periods of 30, 90 or 180 days, as elected by
the borrower. As of December 31, 2008, the weighted average
borrowing rate for amounts borrowed under this note was 2.5%. We
are not required to comply with any financial or non-financial
covenants under this note.
On May 12, 2008, Delek executed a second promissory note in
favor of Bank Leumi USA for $20.0 million. The proceeds of
this note were used to reduce short term debt and for working
capital needs. This note matures on May 11, 2011, and bears
interest, payable for the applicable interest period, at a fixed
spread over the LIBOR rate (Reserve Adjusted) for interest
periods of 30 or 90 days, as elected by the borrower. As of
December 31, 2008, the weighted average borrowing rate for
amounts borrowed under the Bank Leumi Note was 4.3%. This note
was amended in December 2008 to change the financial covenant
calculation methodology and applicability. We are required to
comply with certain financial and non-financial covenants under
this credit agreement. We were in compliance with all covenant
requirements as of December 31, 2008.
Reliant
Bank Revolver
On March 28, 2008, we entered into a revolving credit
agreement with Reliant Bank, a Tennessee bank, headquartered in
Brentwood, Tennessee. The credit agreement provides for
unsecured loans of up to $12.0 million and we had
$6.5 million outstanding under this facility as of
December 31, 2008. The facility matures on March 28,
2011 and bears interest at a fixed spread over the 30 day
LIBOR rate. As of December 31, 2008, the weighted average
borrowing rate was 4.4%. This agreement was amended in September
2008 to conform certain portions of the financial covenant
definition to those contained in some of our other credit
agreements. We are required to comply with certain financial and
non-financial covenants under this revolver. We were in
compliance with all covenant requirements as of
December 31, 2008.
57
Capital
Spending
A key component of our long-term strategy is our capital
expenditure program. Our capital expenditures for 2008 were
$102.1 million, of which $82.9 million was spent in
our refining segment, $0.9 million in our marketing segment
and $18.3 million was spent in our retail segment. Our
capital expenditure budget is approximately $143.5 million
for 2009. The following table summarizes our actual capital
expenditures for 2008 and planned capital expenditures for 2009
by operating segment and major category (in millions):
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009 Budget
|
|
|
2008 Actual
|
|
|
Refining:
|
|
|
|
|
|
|
|
|
Sustaining maintenance, including turnaround activities
|
|
$
|
30.0
|
|
|
$
|
7.6
|
|
Regulatory
|
|
|
13.0
|
|
|
|
37.8
|
|
Saturates Gas Plant rebuild
|
|
|
40.0
|
|
|
|
|
|
Discretionary projects
|
|
|
41.0
|
|
|
|
37.5
|
|
|
|
|
|
|
|
|
|
|
Refining segment total
|
|
|
124.0
|
|
|
|
82.9
|
|
|
|
|
|
|
|
|
|
|
Marketing:
|
|
|
|
|
|
|
|
|
Discretionary projects
|
|
|
1.5
|
|
|
|
0.9
|
|
|
|
|
|
|
|
|
|
|
Marketing segment total
|
|
|
1.5
|
|
|
|
0.9
|
|
|
|
|
|
|
|
|
|
|
Retail:
|
|
|
|
|
|
|
|
|
Sustaining maintenance
|
|
|
4.0
|
|
|
|
2.4
|
|
Growth/profit improvement
|
|
|
2.5
|
|
|
|
4.3
|
|
Store enhancements
|
|
|
3.0
|
|
|
|
4.8
|
|
Re-image/builds
|
|
|
8.5
|
|
|
|
6.8
|
|
|
|
|
|
|
|
|
|
|
Retail segment total
|
|
|
18.0
|
|
|
|
18.3
|
|
|
|
|
|
|
|
|
|
|
Total capital spending
|
|
$
|
143.5
|
|
|
$
|
102.1
|
|
|
|
|
|
|
|
|
|
|
In 2009, we plan to spend approximately $18.0 million in
the retail segment, $11.5 million of which is expected to
consist of one raze and rebuild and the re-imaging
of 35 to 40 of our existing stores. We spent $11.6 million
on similar projects in 2008. We expect to spend approximately
$13.0 million on regulatory projects in the refining
segment in 2009. We spent $37.8 million on such projects in
2008. We expect the spending on crude optimization projects in
2009 to be $28.5 million. In addition, we plan to spend
approximately $30.0 million on maintenance projects, of
which approximately $24.0 million relates to scheduled
turnaround activities, approximately $40.0 million to
rebuild the saturates gas plant due to the refinery fire and
explosion, of which we have a $5.0 million property damage
insurance deductible and we expect the remainder to be covered
under our insurance policy, and approximately $12.5 million
for other discretionary projects in 2009.
The amount of our capital expenditure budget is subject to
change due to unanticipated increases in the cost, scope and
completion time for our capital projects. For example, we may
experience increases in the cost of
and/or
timing to obtain necessary equipment required for our continued
compliance with government regulations or to complete
improvement projects to the refinery. Additionally, the scope
and cost of employee or contractor labor expense related with
installation of that equipment could increase from our
projections.
58
Contractual
Obligations and Commitments
Information regarding our known contractual obligations of the
types described below as of December 31, 2008, is set forth
in the following table (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
<1 Year
|
|
|
1-3 Years
|
|
|
3-5 Years
|
|
|
>5 Years
|
|
|
Total
|
|
|
Long term debt, notes payable and capital lease obligations
|
|
$
|
83.9
|
|
|
$
|
182.6
|
|
|
$
|
19.0
|
|
|
$
|
0.5
|
|
|
$
|
286.0
|
|
Interest(1)
|
|
|
9.4
|
|
|
|
10.3
|
|
|
|
0.6
|
|
|
|
|
|
|
|
20.3
|
|
Operating lease commitments(2)
|
|
|
12.9
|
|
|
|
20.2
|
|
|
|
11.1
|
|
|
|
14.1
|
|
|
|
58.3
|
|
Capital project commitments(3)
|
|
|
|
|
|
|
2.2
|
|
|
|
|
|
|
|
|
|
|
|
2.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
106.2
|
|
|
$
|
215.3
|
|
|
$
|
30.7
|
|
|
$
|
14.6
|
|
|
$
|
366.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes expected payments on debt outstanding under credit
facilities in place at December 31, 2008. Variable interest
is calculated using December 31, 2008 rates. |
|
(2) |
|
Amounts reflect future estimated lease payments under operating
leases having remaining non-cancelable terms in excess of one
year as of December 31, 2008. |
|
(3) |
|
Amounts constitute a minimum obligation that would be required
as a penalty payment if a certain capital project is not
completed. We have no expectation that this capital project will
not be completed. |
Off-Balance
Sheet Arrangements
We have no off-balance sheet arrangements.
Critical
Accounting Policies
The fundamental objective of financial reporting is to provide
useful information that allows a reader to comprehend the
business activities of Delek. We prepare our consolidated
financial statements in conformity with accounting principles
generally accepted in the United States, and in the process of
applying these principles, we must make judgments, assumptions
and estimates based on the best available information at the
time. To aid a readers understanding, management has
identified Deleks critical accounting policies. These
policies are considered critical because they are both most
important to the portrayal of our financial condition and
results, and require our most difficult, subjective or complex
judgments. Often they require judgments and estimation about
matters which are inherently uncertain and involve measuring at
a specific point in time, events which are continuous in nature.
Actual results may differ based on the accuracy of the
information utilized and subsequent events, some over which we
may have little or no control.
LIFO
Inventory
Refining segment inventory consists of crude oil, refined
petroleum products and blendstocks which are stated at the lower
of cost or market. Cost is determined under the
last-in,
first-out (LIFO) valuation method. The LIFO method
requires management to make estimates on an interim basis of the
anticipated year-end inventory quantities, which could differ
from actual quantities.
Delek believes the accounting estimate related to the
establishment of anticipated year-end LIFO inventory is a
critical accounting estimate because it requires management to
make assumptions about future production rates in the refinery,
the future buying patterns of our customers, as well as numerous
other factors beyond our control including the economic
viability of the general economy, weather conditions, the
availability of imports, the marketing of competitive fuels and
government regulation. The impact of changes in actual
performance versus these estimates could be material to the
inventories reported on our quarterly balance sheets and the
results reported in our quarterly statements of operations could
be material. In selecting assumed inventory levels, Delek uses
historical trending of production and sales, recognition of
current market indicators of future pricing and value, and new
regulatory requirements which might impact inventory levels.
Managements assumptions require significant judgment
because actual year-end inventory levels have fluctuated in the
past and may continue to do so.
59
At each year-end, actual physical inventory levels are used to
calculate both ending inventory balances and final cost of goods
sold for the year.
Long-lived
Asset Recovery
A significant portion of our total assets are long-lived assets,
consisting primarily of property, plant and equipment
(PP&E), definite life intangibles and goodwill.
Changes in technology, changes in the regulatory climate,
Deleks intended use for the assets, as well as changes in
broad economic or industry factors, may cause the estimated
period of use or the value of these assets to change.
Property,
Plant and Equipment and Definite Life Intangibles
Impairment
PP&E and definite life intangibles are evaluated for
impairment whenever indicators of impairment exist. Accounting
standards require that if an impairment indicator is present,
Delek must assess whether the carrying amount of the asset is
unrecoverable by estimating the sum of the future cash flows
expected to result from the asset, undiscounted and without
interest charges. If the carrying amount is more than the
recoverable amount, an impairment charge must be recognized
based on the fair value of the asset.
Property and equipment of retail stores we are closing are
written down to their estimated net realizable value at the time
we close such stores. Changes in market demographics,
competition, economic conditions and other factors can impact
the operations of certain locations. Cash flows vary from year
to year, and we analyze regional market, division and store
operations. As a result, we identified and recorded impairment
charges of $0.4 million and $0.3 million for closed
stores in 2008 and 2007. In both 2007 and 2006, we turned
certain locations into unbranded dealer operations. Similar
changes may occur in the future that will require us to record
impairment charges.
Goodwill
and Potential Impairment
Goodwill is reviewed at least annually for impairment or more
frequently if indicators of impairment exist. Goodwill is tested
by comparing net book value of the operating segments to the
estimated fair value of the reporting unit. In assessing the
recoverability of goodwill, assumptions are made with respect to
future business conditions and estimated expected future cash
flows to determine the fair value of a reporting unit. If these
estimates and assumptions change in the future due to such
factors as a decline in general economic conditions, competitive
pressures on sales and margins, and other economic and industry
factors beyond managements control, an impairment charge
may be required. Details of remaining goodwill balances by
segment are included in Note 9 to the consolidated
financial statements in Item 8, Financial Statements and
Supplementary Data, of this Annual Report on
Form 10-K
and are incorporated herein by reference.
Vendor
Discounts and Deferred Revenue
In our retail segment, we receive cash discounts or cash
payments from certain vendors related to product promotions
based upon factors such as quantities purchased, quantities
sold, merchandise exclusivity, store space and various other
factors. In accordance with the provisions of the FASB EITF
Issue
No. 02-16,
Accounting by a Reseller for Consideration Received from a
Vendor, we recognize these amounts as a reduction of
inventory until the products are sold, at which time the amounts
are reflected as a reduction in cost of goods sold. Certain of
these amounts are received from vendors related to agreements
covering several periods. These amounts are initially recorded
as deferred revenue, are reclassified as a reduction in
inventory upon receipt of the products and are subsequently
recognized as a reduction of cost of goods sold as the products
are sold.
We make assumptions and judgments regarding, for example, the
likelihood of attaining specified levels of purchases or selling
specified volumes of products, and the duration of carrying a
specified product. In selecting estimates, we use historical
trending of sales, market industry information and recognition
of current market indicators about general economic conditions
which might impact future sales. The impact of changes in actual
performance versus these estimates could be material.
60
Environmental
Expenditures
It is our policy to accrue environmental and
clean-up
related costs of a non-capital nature when it is both probable
that a liability has been incurred and the amount can be
reasonably estimated. Environmental liabilities represent the
current estimated costs to investigate and remediate
contamination at our properties. This estimate is based on
internal and third-party assessments of the extent of the
contamination, the selected remediation technology and review of
applicable environmental regulations. Accruals for estimated
costs from environmental remediation obligations generally are
recognized no later than completion of the remedial feasibility
study, and include, but are not limited to, costs to perform
remedial actions and costs of machinery and equipment that is
dedicated to the remedial actions and that does not have an
alternative use. Such accruals are adjusted as further
information develops or circumstances change. We discount
environmental liabilities to their present value if payments are
fixed and determinable. Expenditures for equipment necessary for
environmental issues relating to ongoing operations are
capitalized.
Changes in laws and regulations, the financial condition of
state trust funds associated with environmental remediation and
actual remediation expenses compared to historical experience
could significantly impact our results of operations and
financial position. We believe the estimates selected, in each
instance, represent our best estimate of future outcomes, but
the actual outcomes could differ from the estimates selected.
New
Accounting Pronouncements
In December 2007, the FASB issued SFAS No. 141
(Revised), Business Combinations
(SFAS 141(R)). This Statement will apply to
all transactions in which an entity obtains control of one or
more other businesses. In general, SFAS 141(R) requires the
acquiring entity in a business combination to recognize the fair
value of all the assets acquired and liabilities assumed in the
transaction; establishes the acquisition date as the fair value
measurement point; and modifies the disclosure requirements.
This Statement applies prospectively to business combinations
for which the acquisition date is on or after January 1,
2009. However, accounting for changes in valuation allowances
for acquired deferred tax assets and the resolution of uncertain
tax positions for prior business combinations will impact tax
expense instead of impacting the prior business combination
accounting starting January 1, 2009. Delek has adopted
SFAS 141(R) effective January 1, 2009 and will assess
the impact of FAS 141(R) in the event it enters into a
business combination for which the expected acquisition date is
subsequent to adoption.
Also in December 2007, the FASB issued SFAS No. 160,
Noncontrolling Interests in Consolidated Financial
Statements an amendment of ARB No. 51
(SFAS 160), which changes the classification of
non-controlling interests, sometimes called a minority interest,
in the consolidated financial statements. Additionally, this
Statement establishes a single method of accounting for changes
in a parent companys ownership interest that do not result
in deconsolidation and requires a parent company to recognize a
gain or loss when a subsidiary is deconsolidated. This Statement
is effective January 1, 2009, and will be applied
prospectively with the exception of the presentation and
disclosure requirements which must be applied retrospectively.
Delek has no minority interest reporting in its consolidated
reporting, therefore adoption of SFAS 160 will not have an
impact on our financial position or results of operations.
In March 2008, the FASB issued SFAS No. 161,
Disclosures about Derivative Instruments and Hedging
Activities, an amendment of FASB Statement No. 133
(SFAS 161). SFAS 161 applies to all
derivative instruments and nonderivative instruments that are
designated and qualify as hedging instruments pursuant to
paragraphs 37 and 42 of SFAS 133 and related hedged
items accounted for under SFAS 133. The standard requires
entities to provide greater transparency through additional
disclosures about how and why an entity uses derivative
instruments, how derivative instruments and related hedged items
are accounted for under SFAS 133 and its related
interpretations, and how derivative instruments and related
hedged items affect an entitys financial position, results
of operations, and cash flows. SFAS 161 is effective for
financial statements issued for fiscal years beginning after
November 15, 2008. Delek has adopted SFAS 161
effective January 1, 2009. The additional disclosures
required by SFAS 161 will not have an effect on our
financial position or results of operations.
61
|
|
ITEM 7A.
|
QUANTITATIVE
AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
|
Changes in commodity prices (mainly petroleum crude oil and
unleaded gasoline) and interest rates are our primary sources of
market risk. When we make the decision to manage our market
exposure, our objective is generally to avoid losses from
negative price changes, realizing we will not obtain the benefit
of positive price changes.
Commodity
Price Risk
Impact of Changing Prices. Our revenues and
cash flows, as well as estimates of future cash flows, are
sensitive to changes in energy prices. Major shifts in the cost
of crude oil, the prices of refined products and the cost of
ethanol can generate large changes in the operating margin in
each of our segments. Gains and losses on transactions accounted
for using mark-to-market accounting are reflected in cost of
goods sold in the consolidated statements of operations at each
period end. Gains or losses on commodity derivative contracts
accounted for as cash flow hedges are recognized in other
comprehensive income on the consolidated balance sheets and
ultimately, when the forecasted transactions are completed in
net sales or cost of goods sold in the consolidated statements
of operations.
Price Risk Management Activities. At times, we
enter into commodity derivative contracts to manage our price
exposure to our inventory positions, future purchases of crude
oil and ethanol, future sales of refined products or to fix
margins on future production. During 2007, in connection with
our marketing segments supply contracts, we entered into
certain futures contracts. In accordance with
SFAS No. 133, Accounting for Derivative Instruments
and Hedging Activities (SFAS 133), all of
these commodity futures contracts are recorded at fair value,
and any change in fair value between periods has historically
been recorded in the profit and loss section of our consolidated
financial statements. At December 31, 2008 and 2007, we had
open derivative contracts representing 148,000 barrels and
40,000 barrels, respectively, of refined petroleum products
with an unrealized net (loss) gain of $(0.8) million and
$0.1 million, respectively.
In December 2007, in connection with our offering of renewable
fuels in our retail segment markets, we entered into a series of
over the counter (OTC) swaps based on the futures price of
ethanol as quoted on the Chicago Board of Trade and a series of
OTC swaps based on the futures price of unleaded gasoline as
quoted on the New York Mercantile Exchange. In accordance with
SFAS 133, all of these swaps are recorded at fair value,
and any change in fair value between periods has historically
been recorded in the consolidated statements of operations. As
of December 31, 2008 and 2007, we had open derivative
contracts representing 1,214,548 barrels and
276,536 barrels of ethanol, respectively. We had unrealized
net (losses) gains of $(6.8) million and $2.5 million
for the years ended December 31, 2008 and 2007,
respectively. As of December 31, 2008 and 2007, we also had
open derivative contracts representing 1,200,000 barrels
and 270,000 barrels, respectively, of unleaded gasoline. We
had unrealized net gains (losses) of $11.1 million and
$(1.9) million for the years ended December 31, 2008
and 2007, respectively.
In March 2008, we entered into a series of OTC swaps based on
the future price of West Texas Intermediate Crude (WTI) as
quoted on the NYMEX which fixed the purchase price of WTI for a
predetermined number of barrels at future dates from July 2008
through December 2009. We also entered into a series of OTC
swaps based on the future price of Ultra Low Sulfur Diesel
(ULSD) as quoted on the Gulf Coast ULSD PLATTS which fixed the
sales price of ULSD for a predetermined number of gallons at
future dates from July 2008 through December 2009.
In accordance with SFAS 133, the WTI and ULSD swaps were
designated as cash flow hedges and the change in fair value
between the inception date and the end of period was recorded in
other comprehensive income. However, as of November 20,
2008, due to the suspension of operations at the refinery, the
cash flow designation was removed because the probability of
occurrence of the hedged forecasted transactions for the period
of the shutdown became remote. All changes in the fair value of
these swaps subsequent to November 20, 2008 have been
recognized in the statement of operations. For the year ended
December 31, 2008, we recognized unrealized gains of
$10.7 million, which are included as an adjustment to cost
of goods sold in the consolidated statements of operations in
Item 8, Financial Statements and Supplementary Data in this
Annual Report on
Form 10-K,
as a result of the discontinuation of these cash flow hedges.
For the year ended December 31, 2008, Delek recorded
unrealized losses as a component of other comprehensive income
of $0.9 million ($0.6 million, net of deferred taxes)
related to the change in the fair value of the swaps prior to
de-designation. The fair value of these contracts will be
recognized
62
in income beginning in May 2009, at the time the positions are
closed and the hedged transactions are recognized in income. We
also recognized a gain of $0.5 million relating to the
ineffective portion of these hedges as of November 20,
2008. As of December 31, 2008, Delek had total unrealized
losses, net of deferred income taxes, in accumulated other
comprehensive income of $0.6 million associated with its
cash flow hedges.
We maintain at our refinery and in third-party facilities
inventories of crude oil, feedstocks and refined petroleum
products, the values of which are subject to wide fluctuations
in market prices driven by world economic conditions, regional
and global inventory levels and seasonal conditions. At
December 31, 2008, we held approximately 0.9 million
barrels of crude and product inventories valued under the LIFO
valuation method with an average cost of $42.03 per barrel. As
of December 31, 2008, market values had fallen below most
of our LIFO inventory layer values and, as a result, we
recognized a pre-tax loss of approximately $10.9 million
relating to the reflection of market value at a level below
cost. Such losses are subject to reversal in subsequent periods,
not to exceed LIFO cost, if prices recover. Replacement cost
(FIFO) exceeded carrying value of LIFO costs by a nominal
amount. We refer to this excess as our LIFO reserve.
Interest
Rate Risk
We have market exposure to changes in interest rates relating to
our outstanding variable rate borrowings, which totaled
$285.0 million as of December 31, 2008. We help manage
this risk through interest rate swap and cap agreements that
modify the interest characteristics of our outstanding long-term
debt. In accordance with SFAS 133, all interest rate
hedging instruments are recorded at fair value and any changes
in the fair value between periods are recognized in earnings.
The fair value of our interest rate hedging instruments
decreased by $1.0 million and $2.4 million for the
years ending December 31, 2008 and 2007, respectively. The
fair values of our interest rate swaps and cap agreements are
obtained from dealer quotes. These values represent the
estimated amount that we would receive or pay to terminate the
agreements taking into account the difference between the
contract rate of interest and rates currently quoted for
agreements, of similar terms and maturities. We expect that
interest rate derivatives will reduce our exposure to short-term
interest rate movements. The annualized impact of a hypothetical
one percent change in interest rates on floating rate debt
outstanding as of December 31, 2008 would be to change
interest expense by $2.9 million. Increases in rates would
be partially mitigated by interest rate derivatives mentioned
above. As of December 31, 2008, we had interest rate cap
agreements in place representing $73.8 million in notional
value with various settlement dates, the latest of which expires
in July 2010. These interest rate caps range from 3.75% to 4.00%
as measured by the
3-month
LIBOR rate and include a knock-out feature at rates ranging from
6.65% to 7.15% using the same measurement rate. The fair value
of our interest rate derivatives was nominal as of
December 31, 2008 and $1.0 million as of
December 31, 2007.
The types of instruments used in our hedging and trading
activities described above include swaps and futures. Our
positions in derivative commodity instruments are monitored and
managed on a daily basis by a risk management committee to
ensure compliance with our risk management strategies which have
been approved by our board of directors.
|
|
ITEM 8.
|
FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
|
The information required by Item 8 is incorporated by
reference to the section beginning on
page F-1.
|
|
ITEM 9.
|
CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
|
None.
|
|
ITEM 9A.
|
CONTROLS
AND PROCEDURES
|
Disclosure
Controls and Procedures
We maintain disclosure controls and procedures (as defined in
Rule 13a-15(e)
and
15d-15(e))
under the Exchange Act that are designed to provide reasonable
assurance that the information that we are required to disclose
in the reports we file or submit under the Exchange Act is
recorded, processed, summarized and reported within the
63
time periods specified in the SECs rules and forms, and
such information is accumulated and communicated to our
management, including our Chief Executive Officer and Chief
Financial Officer, as appropriate, to allow timely decisions
regarding required disclosure. It should be noted that, because
of inherent limitations, our disclosure controls and procedures,
however well designed and operated, can provide only reasonable,
and not absolute, assurance that the objectives of the
disclosure controls and procedures are met.
As required by paragraph (b) of
Rules 13a-15
and 15d-15
under the Exchange Act, our Chief Executive Officer and our
Chief Financial Officer have evaluated the effectiveness of our
disclosure controls and procedures (as such term is defined in
Rules 13a-15(e)
and
15d-15(e)
under the Exchange Act) as of the end of the period covered by
this report. Based on such evaluation, our Chief Executive
Officer and our Chief Financial Officer have concluded, as of
the end of the period covered by this report, that our
disclosure controls and procedures were effective to ensure that
the information that we are required to disclose in the reports
we file or submit under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in SEC
rules and forms and such information is accumulated and
communicated to our management, including our Chief Executive
Officer and Chief Financial Officer, as appropriate, to allow
timely decisions regarding required disclosure.
Managements
Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining
adequate internal control over financial reporting. Our internal
control over financial reporting is a process that is designed
under the supervision of our Chief Executive Officer and Chief
Financial Officer, and effected by our Board of Directors,
management and other personnel, to provide reasonable assurance
regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in
accordance with accounting principles generally accepted in the
United States. Our internal control over financial reporting
includes those policies and procedures that:
i. Pertain to the maintenance of records that, in
reasonable detail, accurately and fairly reflect the
transactions and dispositions of our assets;
ii. Provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial
statements in accordance with accounting principles generally
accepted in the United States, and that receipts and
expenditures recorded by us are being made only in accordance
with authorizations of our management and Board of
Directors; and
iii. Provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use or disposition
of our assets that could have a material effect on our financial
statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies and procedures may deteriorate.
Management has conducted its evaluation of the effectiveness of
internal control over financial reporting as of
December 31, 2008, based on the framework in Internal
Control Integrated Framework issued by the Committee
of Sponsoring Organizations of the Treadway Commission.
Managements assessment included an evaluation of the
design of our internal control over financial reporting and
testing the operational effectiveness of our internal control
over financial reporting. Management reviewed the results of the
assessment with the Audit Committee of the Board of Directors.
Based on its assessment, management determined that, at
December 31, 2008, we maintained effective internal control
over financial reporting.
Report of
Independent Registered Public Accounting Firm
Our independent registered public accounting firm,
Ernst & Young LLP, has audited the effectiveness of
our internal control over financial reporting as of
December 31, 2008, as stated in their report, which is
included in the section beginning on
page F-1.
The information required by Item 8 is incorporated by
reference to the section beginning on
page F-1.
64
Changes
in Internal Control over Financial Reporting
There have been no changes in our internal control over
financial reporting during the fourth quarter of fiscal 2008
that have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.
From time to time, we make changes to our internal control over
financial reporting that are intended to enhance its
effectiveness and which do not have a material effect on our
overall internal control over financial reporting. We will
continue to evaluate the effectiveness of our disclosure
controls and procedures and internal control over financial
reporting on an ongoing basis and will take action as
appropriate.
|
|
ITEM 9B.
|
OTHER
INFORMATION
|
None.
PART III
|
|
ITEM 10.
|
Directors,
Executive Officers and Corporate Governance
|
The information required by Item 401 of
Regulation S-K
regarding directors will be included under Election of
Directors in the definitive Proxy Statement for our Annual
Meeting of Stockholders to be held May 5, 2009 (the
Definitive Proxy Statement), and is incorporated
herein by reference. Information regarding executive officers
will be included under Management in the Definitive
Proxy Statement and is incorporated herein by reference. The
information required by Item 405 of
Regulation S-K
will be included under Section 16(a) Beneficial
Ownership Reporting Compliance in the Definitive Proxy
Statement and is incorporated herein by reference. The
information required by Items 407(c)(3), (d)(4), and (d)(5)
of
Regulation S-K
will be included under Corporate Governance in the
Definitive Proxy Statement and is incorporated herein by
reference.
Our Board Governance Guidelines, our charters for our Audit and
Compensation Committees and our Code of Business
Conduct & Ethics covering all employees, including our
principal executive officer, principal financial officer,
principal accounting officer and controllers, are available on
our website, www.DelekUS.com , and a copy will be mailed upon
request to Investor Relations, Delek US Holdings, Inc. or
ir@delekus.com. We intend to disclose any amendments to or
waivers of the Code of Business Conduct & Ethics on
behalf of our Chief Executive Officer, Chief Financial Officer,
Controller, and persons performing similar functions on our
website, at www.DelekUS.com , under the Investor
Relations caption, promptly following the date of any such
amendment or waiver.
|
|
ITEM 11.
|
Executive
Compensation
|
The information required by this Item will be included under
Executive Compensation and Corporate
Governance in the Definitive Proxy Statement and is
incorporated herein by reference.
|
|
ITEM 12.
|
Security
Ownership of Certain Owners and Management and Related
Stockholder Matters
|
The information required by this Item will be included under the
headings Security Ownership of Certain Beneficial Owners
and Management and Equity Compensation Plan
Information in the Definitive Proxy Statement and is
incorporated herein by reference.
|
|
ITEM 13.
|
Certain
Relationships and Related Transactions and Director
Independence
|
The information required by this Item will be included under
Certain Relationships and Related Transactions,
Election of Directors and Corporate
Governance in the Definitive Proxy Statement and is
incorporated herein by reference.
|
|
ITEM 14.
|
Principal
Accounting Fees and Services
|
The information required by this Item will be included under
Relationship with Independent Auditors in the
Definitive Proxy Statement and is incorporated herein by
reference.
65
PART IV
|
|
ITEM 15.
|
EXHIBITS AND
FINANCIAL STATEMENT SCHEDULES
|
(a) Certain Documents Filed as Part of this Annual Report
on
Form 10-K
1. Financial Statements
2. Exhibits See below
|
|
|
|
|
Exhibit No.
|
|
Description
|
|
|
3
|
.1
|
|
Amended and Restated Certificate of Incorporation (incorporated
by reference to Exhibit 3.1 to the Companys
Registration Statement on
Form S-1/A,
filed on April 20, 2006, SEC File
No. 333-131675)
|
|
3
|
.2
|
|
Amended and Restated Bylaws (incorporated by reference to
Exhibit 3.2 to the Companys Registration Statement on
Form S-1/A,
filed on April 20, 2006, SEC File
No. 333-131675)
|
|
4
|
.1
|
|
Specimen common stock certificate (incorporated by reference to
Exhibit 4.1 to the Companys Registration Statement on
Form S-1/A,
filed on April 20, 2006, SEC File
No. 333-131675)
|
|
10
|
.1*
|
|
Employment Agreement, dated as of May 1, 2004, by and
between MAPCO Express, Inc., Uzi Yemin and Delek US Holdings,
Inc. (incorporated by reference to Exhibit 10.1 to the
Companys Registration Statement on
Form S-1,
filed on February 8, 2006, SEC File
No. 333-131675)
|
|
10
|
.1(a)*
|
|
Amendment No. 1 to Employment Agreement, dated as of
October 31, 2005 and effective as of September 15,
2005, by and among MAPCO Express, Inc., Delek US Holdings, Inc.
and Uzi Yemin (incorporated by reference to Exhibit 10.1(a)
to the Companys Registration Statement on
Form S-1,
filed on February 8, 2006, SEC File
No. 333-131675)
|
|
10
|
.1(b)*
|
|
Amendment No. 2 to Employment Agreement, dated as of
February 1, 2006, by and among MAPCO Express, Inc., Delek
US Holdings, Inc. and Uzi Yemin (incorporated by reference to
Exhibit 10.1(b) to the Companys Registration
Statement on
Form S-1,
filed on February 8, 2006, SEC File
No. 333-131675)
|
|
10
|
.1(c)*
|
|
Amendment No. 3 to Employment Agreement, dated as of
April 17, 2006, by and among MAPCO Express, Inc., Delek US
Holdings, Inc. and Uzi Yemin (incorporated by reference to
Exhibit 10.1(c) to the Companys Registration
Statement on
Form S-1/A,
filed on April 20, 2006, SEC File
No. 333-131675)
|
|
10
|
.1(d)*
|
|
Amendment No. 4 to Employment Agreement, dated as of
November 13, 2006, by and among MAPCO Express, Inc., Delek
US Holdings, Inc. and Uzi Yemin (incorporated by reference to
Exhibit 10.1(d) to the Companys
Form 10-K
filed on March 20, 2007)
|
|
10
|
.1(e)*
|
|
Amendment No. 5 dated July 23, 2007 to Employment
Agreement by and among MAPCO Express, Inc., Delek US Holdings,
Inc. and Uzi Yemin (incorporated by reference to
Exhibit 10.2 to the Companys
Form 10-Q
filed on November 9, 2007)
|
|
10
|
.2*
|
|
Amended and Restated Consulting Agreement, dated as of
April 11, 2006, by and between Greenfeld-Energy Consulting,
Ltd. and Delek Refining, Ltd. (incorporated by reference to
Exhibit 10.2 to the Companys Registration Statement
on
Form S-1/A,
filed on April 20, 2006, SEC File
No. 333-131675)
|
|
10
|
.3*
|
|
Form of Indemnification Agreement for Directors and Officers
(incorporated by reference to Exhibit 10.3 to the
Companys Registration Statement on
Form S-1/A,
filed on April 20, 2006, SEC File
No. 333-131675)
|
|
10
|
.4
|
|
Registration Rights Agreement, dated as of April 17, 2006,
by and between Delek US Holdings, Inc. and Delek Group Ltd.
(incorporated by reference to Exhibit 10.4 to the
Companys Registration Statement on
Form S-1/A,
filed on April 20, 2006, SEC File
No. 333-131675)
|
|
10
|
.5
|
|
Amended and Restated Credit Agreement, dated as of
April 28, 2005, among MAPCO Express, Inc., MAPCO Family
Centers, Inc., the several lenders from time to time party to
the Agreement, Lehman Brothers Inc., SunTrust Bank, Bank Leumi
USA and Lehman Commercial Paper Inc. (incorporated by reference
to Exhibit 10.7 to the Companys Registration
Statement on
Form S-1,
filed on February 8, 2006, SEC File
No. 333-131675)
|
66
|
|
|
|
|
Exhibit No.
|
|
Description
|
|
|
10
|
.5(a)
|
|
First Amendment to Amended and Restated Credit Agreement, dated
as of August 18, 2005, among MAPCO Express, Inc., MAPCO
Family Centers, Inc., the several banks and other financial
institutions or entities from time to time parties thereto,
Lehman Brothers Inc., SunTrust Bank, Bank Leumi USA and Lehman
Commercial Paper Inc. (incorporated by reference to
Exhibit 10.7(a) to the Companys Registration
Statement on
Form S-1,
filed on February 8, 2006, SEC File
No. 333-131675)
|
|
10
|
.5(b)
|
|
Second Amendment to Amended and Restated Credit Agreement, dated
as of October 11, 2005, among MAPCO Express, Inc., the
several banks and other financial institutions or entities from
time to time parties to the Agreement, Lehman Brothers Inc.,
SunTrust Bank, Bank Leumi USA and Lehman Commercial Paper Inc.
(incorporated by reference to Exhibit 10.7(b) to the
Companys Registration Statement on
Form S-1,
filed on February 8, 2006, SEC File
No. 333-131675)
|
|
10
|
.5(c)
|
|
Third Amendment to Amended and Restated Credit Agreement, dated
as of December 15, 2005, among MAPCO Express, Inc., the
several banks and other financial institutions or entities from
time to time parties to the Credit Agreement, Lehman Brothers
Inc., SunTrust Bank, Bank Leumi USA and Lehman Commercial Paper
Inc. (incorporated by reference to Exhibit 10.7(c) to the
Companys Registration Statement on
Form S-1,
filed on February 8, 2006, SEC File
No. 333-131675)
|
|
10
|
.5(d)
|
|
Fourth Amendment to Amended and Restated Credit Agreement, dated
as of April 18, 2006, among MAPCO Express, Inc., the
several banks and other financial institutions or entities from
time to time parties to the Credit Agreement, Lehman Brothers,
Inc., SunTrust Bank, Bank Leumi USA and Lehman Commercial Paper
Inc. (incorporated by reference to Exhibit 10.7(d) to the
Companys Registration Statement on
Form S-1/A,
filed on April 20, 2006, SEC File
No. 333-131675)
|
|
10
|
.5(e)
|
|
Fifth Amendment to Amended and Restated Credit Agreement, dated
as of June 14, 2006, among MAPCO Express, Inc., the several
banks and other financial institutions or entities from time to
time parties to the Credit Agreement, Lehman Brothers, Inc.,
SunTrust Bank, Bank Leumi USA and Lehman Commercial Paper Inc.
(incorporated by reference to Exhibit 10.3 to the
Companys
Form 10-Q
filed on August 11, 2006)
|
|
10
|
.5(f)
|
|
Sixth Amendment to Amended and Restated Credit Agreement entered
into effective July 13, 2006, among MAPCO Express, Inc.,
the several banks and other financial institutions or entities
from time to time parties to the Credit Agreement, Lehman
Brothers, Inc., SunTrust Bank, Bank Leumi USA and Lehman
Commercial Paper, Inc. (incorporated by reference to
Exhibit 10.1 to the Companys
Form 10-Q
filed on November 14, 2006)
|
|
10
|
.5(g)
|
|
Seventh Amendment to Amended and Restated Credit Agreement
entered into effective March 30, 2007, among MAPCO Express,
Inc., the several banks and other financial institutions or
entities, from time to time, parties to the Credit Agreement,
Lehman Brothers, Inc., SunTrust Bank, Bank Leumi USA and Lehman
Commercial Paper, Inc. (incorporated by reference to
Exhibit 10.3 to the Companys
Form 10-Q
filed on May 15, 2007)
|
|
10
|
.5(h)
|
|
Eighth Amendment to Amended and Restated Credit Agreement
entered into effective December 3, 2008, among MAPCO
Express, Inc., the several banks and other financial
institutions or entities, from time to time, parties to the
Credit Agreement, Lehman Brothers, Inc., SunTrust Bank, Bank
Leumi USA and Lehman Commercial Paper, Inc.
|
|
10
|
.5(i)
|
|
Ninth Amendment to the Amended and Restated Credit Agreement
entered into effective January 28, 2009, among MAPCO
Express, Inc., the several banks and other financial
institutions or entities, from time to time, parties to the
Credit Agreement, Lehman Brothers, Inc., SunTrust Bank, Bank
Leumi USA and Lehman Commercial Paper, Inc.
|
|
10
|
.6
|
|
Amended and Restated Revolving Credit Agreement, dated as of
May 2, 2005, among Delek Refining, Ltd., Delek Pipeline
Texas, Inc., the several banks and other financial institutions
and lenders from time to time party thereto, SunTrust Bank, The
CIT Group/Business Credit, Inc., National City Business Credit,
Inc., Bank of America, N.A. and PNC Business Credit, Inc.
(incorporated by reference to Exhibit 10.8 to the
Companys Registration Statement on
Form S-1,
filed on February 8, 2006, SEC File
No. 333-131675)
|
|
10
|
.6(a)
|
|
First Amendment to Amended and Restated Credit Agreement, dated
as of October 1, 2005, among Delek Refining, Ltd., Delek
Pipeline Texas, Inc., various financial institutions, SunTrust
Bank and The CIT Group/Business Credit, Inc. (incorporated by
reference to Exhibit 10.8(a) to the Companys
Registration Statement on
Form S-1,
filed on February 8, 2006, SEC File
No. 333-131675)
|
67
|
|
|
|
|
Exhibit No.
|
|
Description
|
|
|
10
|
.6(b)
|
|
Second Amended and Restated Credit Agreement, dated as of
October 13, 2006, among Delek Refining, Ltd., Delek
Pipeline Texas, Inc. and various financial institutions
including SunTrust Bank as administrative agent, issuing bank,
swingline lender and collateral agent. (incorporated by
reference to Exhibit 10.8(b) to the Companys
Form 10-K
filed on March 20, 2007)
|
|
10
|
.6(c)
|
|
First Amendment to Second Amended and Restated Credit Agreement,
dated as of December 15, 2008, among Delek Refining, Ltd.,
Delek Pipeline Texas, Inc., various financial institutions
including SunTrust Bank as administrative agent, issuing bank,
swingline lender and collateral agent.
|
|
10
|
.6(d)
|
|
Letter Agreement (Second Amendment) to Second Amended and
Restated Credit Agreement, dated as of January 30, 2009,
among Delek Refining, Ltd., Delek Pipeline Texas, Inc. and
various financial institutions including SunTrust Bank as
administrative agent, issuing bank, swingline lender and
collateral agent.
|
|
10
|
.6(e)
|
|
Third Amendment to Second Amended and Restated Credit Agreement,
dated as of February 13, 2009, among Delek Refining, Ltd.,
Delek Pipeline Texas, Inc. and various financial institutions
including SunTrust Bank as administrative agent, issuing bank,
swingline lender and collateral agent.
|
|
10
|
.6(f)
|
|
Fourth Amendment to Second Amended and Restated Credit
Agreement, dated as of February 18, 2009, among Delek
Refining, Ltd., Delek Pipeline Texas, Inc. and various financial
institutions including SunTrust Bank as administrative agent,
issuing bank, swingline lender and collateral agent.
|
|
10
|
.7+
|
|
Pipeline Capacity Lease Agreement, dated April 12, 1999,
between La Gloria Oil and Gas Company and Scurlock Permian,
LLC (incorporated by reference to Exhibit 10.11 to the
Companys Registration Statement on
Form S-1,
filed on February 8, 2006, SEC File
No. 333-131675)
|
|
10
|
.7(a)+
|
|
One-Year Renewal of Pipeline Capacity Lease Agreement, dated
December 21, 2004, between Plains Marketing, L.P., as
successor to Scurlock Permian LLC, and La Gloria Oil and
Gas Company (incorporated by reference to Exhibit 10.11(a)
to the Companys Registration Statement on
Form S-1,
filed on February 8, 2006, SEC File
No. 333-131675)
|
|
10
|
.7(b)+
|
|
Assignment of the Pipeline Capacity Lease Agreement, as amended
and renewed on December 21, 2004, by La Gloria Oil and
Gas Company to Delek Refining, Ltd. (incorporated by reference
to Exhibit 10.11(b) to the Companys Registration
Statement on
Form S-1,
filed on February 8, 2006, SEC File
No. 333-131675)
|
|
10
|
.7(c)+
|
|
Amendment to One-Year Renewal of Pipeline Capacity Lease
Agreement, dated January 15, 2006, between Delek Refining,
Ltd. and Plains Marketing, L.P. (incorporated by reference to
Exhibit 10.11(c) to the Companys Registration
Statement on
Form S-1,
filed on February 8, 2006, SEC File
No. 333-131675)
|
|
10
|
.7(d)
|
|
Extension of Pipeline Capacity Lease Agreement, dated
January 15, 2006, between Delek Refining, Ltd. and Plains
Marketing, L.P. (incorporated by reference to
Exhibit 10.11(d) to the Companys Registration
Statement on
Form S-1,
filed on February 8, 2006, SEC File
No. 333-131675)
|
|
10
|
.7(e)+
|
|
Modification and Extension of Pipeline Capacity Lease Agreement,
effective May 1, 2006, between Delek Refining, Ltd. and
Plains Marketing, L.P. (incorporated by reference to
Exhibit 10.11(e) to the Companys Registration
Statement on
Form S-1/A,
filed on April 20, 2006, SEC File
No. 333-131675)
|
|
10
|
.8+
|
|
Branded Jobber Contract, dated December 15, 2005, between
BP Products North America, Inc. and MAPCO Express, Inc.
(incorporated by reference to Exhibit 10.12 to the
Companys Registration Statement on
Form S-1,
filed on February 8, 2006, SEC File
No. 333-131675)
|
|
10
|
.9*
|
|
Delek US Holdings, Inc. 2006 Long-Term Incentive Plan
(incorporated by reference to Exhibit 10.13 to the
Companys Registration Statement on
Form S-1/A,
filed on April 20, 2006, SEC File
No. 333-131675)
|
|
10
|
.9(a)*
|
|
Form of Delek US Holdings, Inc. 2006 Long-Term Incentive Plan
Restricted Stock Unit Agreement (incorporated by reference to
Exhibit 10.13(a) to the Companys Registration
Statement on
Form S-1/A,
filed on April 20, 2006, SEC File
No. 333-131675)
|
|
10
|
.9(b)*
|
|
Director Form of Delek US Holdings, Inc. 2006 Long-Term
Incentive Plan Stock Option Agreement (incorporated by reference
to Exhibit 10.13(b) to the Companys Registration
Statement on
Form S-1/A,
filed on April 20, 2006, SEC File
No. 333-131675)
|
68
|
|
|
|
|
Exhibit No.
|
|
Description
|
|
|
10
|
.9(c)*
|
|
Officer Form of Delek US Holdings, Inc. 2006 Long-Term Incentive
Plan Stock Option Agreement (incorporated by reference to
Exhibit 10.13(c) to the Companys Registration
Statement on
Form S-1/A,
filed on April 20, 2006, SEC File
No. 333-131675)
|
|
10
|
.10
|
|
Description of Director Compensation (incorporated by reference
to Exhibit 10.8 to the Companys
Form 10-Q
filed on May 15, 2007)
|
|
10
|
.11
|
|
Management and Consulting Agreement, dated as of January 1,
2006, by and between Delek Group Ltd. and Delek US Holdings,
Inc. (incorporated by reference to Exhibit 10.15 to the
Companys Registration Statement on
Form S-1,
filed on February 8, 2006, SEC File
No. 333-131675).
|
|
10
|
.12
|
|
Promissory Note, dated May 23, 2006, in the principal
amount of $30,000,000.00, of Delek Finance, Inc., in favor of
Israel Discount Bank of New York (incorporated by reference to
Exhibit 10.10 to the Companys
Form 10-Q
filed on May 24, 2006)
|
|
10
|
.12(a)
|
|
Amended and Restated Term Loan Note, dated December 30,
2008, in the principal amount of $30,000,000 of Delek Finance,
Inc., in favor of Israel Discount Bank of New York.
|
|
10
|
.13
|
|
Credit Agreement dated July 31, 2006, by and between Delek
Marketing & Supply, LP, and various financial
institutions, from time to time, party to the Agreement, as
Lenders, and Fifth Third Bank, Administrative Agent
(incorporated by reference to Exhibit 10.2 to the
Companys
Form 10-Q
filed on November 14, 2006)
|
|
10
|
.13(a)
|
|
First Amendment dated January 9, 2007 to the Credit
Agreement dated July 31, 2006, by and between Delek
Marketing & Supply, LP, and various financial
institutions, from time to time, party to the Agreement, as
Lenders, and Fifth Third Bank, Administrative Agent
(incorporated by reference to Exhibit 10.1 to the
Companys
Form 10-Q
filed on May 15, 2007)
|
|
10
|
.13(b)
|
|
Second Amendment dated July 27, 2007 to Credit Agreement
dated July 31, 2006 by and between Delek
Marketing & Supply, LP and various financial
institutions from time to time party to the Agreement, as
Lenders, and Fifth Third Bank as Administrative Agent, and L/C
Issuer (incorporated by reference to Exhibit 10.3 to the
Companys
Form 10-Q
filed on November 9, 2007)
|
|
10
|
.13(c)
|
|
Amended and Restated Credit Agreement dated December 19,
2007 by and between Delek Marketing & Supply, LP and
various financial institutions from time to time party to the
agreement, as Lenders, and Fifth Third Bank, as Administrative
Agent and L/C issuer (incorporated by reference to
Exhibit 10.16(c) to the Companys
Form 10-K
filed on March 3, 2008)
|
|
10
|
.13(d)
|
|
First Amendment dated October 17, 2008 to Amended and
Restated Credit Agreement dated December 19, 2007 by and
between Delek Marketing & Supply, LP and various
financial institutions from time to time party to the agreement,
as Lenders, and Fifth Third Bank, as Administrative Agent and
L/C issuer
|
|
10
|
.14
|
|
Promissory Note dated July 27, 2006, by and between Delek
US Holdings, Inc., and Bank Leumi USA as lender (incorporated by
reference to Exhibit 10.3 to the Companys
Form 10-Q
filed on November 14, 2006)
|
|
10
|
.15
|
|
Purchase and Sale Agreement dated February 8, 2007, by and
between MAPCO Express, Inc., Calfee Company of Dalton, Inc., FM
Leasing, LP, FM Leasing I, LP, MF Leasing, LP, AC Stores,
LP, Com-Pac Properties, LLC, Com-Pac Properties Group, LP and
Favorite One Properties, LP. (incorporated by reference to
Exhibit 10.2 to the Companys
Form 10-Q
filed on May 15, 2007)
|
|
10
|
.15(a)
|
|
First Amendment dated April 2, 2007, to the Purchase and
Sale Agreement dated February 8, 2007, by and between MAPCO
Express, Inc., Calfee Company of Dalton, Inc., FM Leasing, LP,
FM Leasing I, LP, MF Leasing, LP, AC Stores, LP, Com-Pac
Properties, LLC, Com-Pac Properties Group, LP and Favorite One
Properties, LP. (incorporated by reference to
Exhibit 10.2(a) to the Companys
Form 10-Q
filed on May 15, 2007)
|
|
10
|
.16
|
|
Credit Agreement dated March 30, 2007, by and between Delek
US Holdings, Inc. and Lehman Commercial Paper Inc., as
administrative agent, Lehman Brothers Inc., as arranger and
joint bookrunner, and JPMorgan Chase Bank, N.A., as
documentation agent, arranger and joint bookrunner (incorporated
by reference to Exhibit 10.4 to the Companys
Form 10-Q
filed on May 15, 2007)
|
69
|
|
|
|
|
Exhibit No.
|
|
Description
|
|
|
10
|
.16(a)
|
|
First Amendment dated August 20, 2007 to the Credit
Agreement dated March 30, 2007 by and between Delek US
Holdings, Inc. and Lehman Commercial Paper, Inc., as
administrative agent, Lehman Brothers, Inc., as arranger and
joint bookrunner, and JPMorgan Chase Bank, N.A. as documentation
agent, arranger and joint bookrunner (incorporated by reference
to Exhibit 10.4 to the Companys
Form 10-Q
filed on November 9, 2007)
|
|
10
|
.16(b)
|
|
Second Amendment dated October 17, 2007 to the Credit
Agreement dated March 30, 2007 by and between Delek US
Holdings, Inc. and Lehman Commercial Paper, Inc., as
administrative agent, Lehman Brothers, Inc. as arranger and
joint bookrunner, and JP Morgan Chase Bank, N.A. as
documentation agent, arranger and joint bookrunner (incorporated
by reference to Exhibit 10.19(b) to the Companys
Form 10-K
filed on March 3, 2008)
|
|
10
|
.16(c)
|
|
Third Amendment dated December 4, 2007 to the Credit
Agreement dated March 30, 2007 by and between Delek US
Holdings, Inc. and Lehman Commercial Paper, Inc., as
administrative agent, Lehman Brothers, Inc. as arranger and
joint bookrunner, and JP Morgan Chase Bank, N.A. as
documentation agent, arranger and joint bookrunner (incorporated
by reference to Exhibit 10.19(c) to the Companys
Form 10-K
filed on March 3, 2008)
|
|
10
|
.16(d)
|
|
Fourth Amendment dated June 26, 2008 to the Credit
Agreement dated March 30, 2007 by and between Delek US
Holdings, Inc. and Lehman Commercial Paper, Inc., as
administrative agent, Lehman Brothers, Inc., as arranger and
joint bookrunner, and JP Morgan Chase Bank, N.A. as
documentation agent, arranger and joint bookrunner (incorporated
by reference to Exhibit 10.1 to the Companys
Form 10-Q
filed on August 11, 2008)
|
|
10
|
.16(e)
|
|
Fifth Amendment dated December 29, 2008 to the Credit
Agreement dated March 30, 2007 by and between Delek US
Holdings, Inc. and Lehman Commercial Paper, Inc., as
administrative agent, Lehman Brothers, Inc., as arranger and
joint bookrunner, and JP Morgan Chase Bank, N.A. as
documentation agent, arranger and joint bookrunner
|
|
10
|
.17*
|
|
Letter Agreement dated September 1, 2004, by and between
MAPCO Express, Inc. and Assaf Ginzburg (incorporated by
reference to Exhibit 10.5 to the Companys
Form 10-Q
filed on May 15, 2007)
|
|
10
|
.18*
|
|
Letter Agreement dated May 25, 2005, by and between MAPCO
Express, Inc. and Edward A. Morgan (incorporated by reference to
Exhibit 10.6 to the Companys
Form 10-Q
filed on May 15, 2007)
|
|
10
|
.19*
|
|
Letter Agreement dated May 25, 2005, by and between Delek
Refining, Inc. and Frederec Green (incorporated by reference to
Exhibit 10.7 to the Companys
Form 10-Q
filed on May 15, 2007)
|
|
10
|
.20
|
|
Stock Purchase Agreement dated July 12, 2007 by and between
TransMontaigne, Inc. and Delek US Holdings, Inc. (incorporated
by reference to Exhibit 10.1 to the Companys
Form 10-Q
filed on November 9, 2007)
|
|
10
|
.21
|
|
Registration Rights Agreement dated August 22, 2007 by and
between Delek US Holdings, Inc. and TransMontaigne, Inc.
(incorporated by reference to Exhibit 10.5 to the
Companys
Form 10-Q
filed on November 9, 2007)
|
|
10
|
.21(a)
|
|
Assignment and Assumption Agreement dated October 9, 2007
by and between TransMontaigne, Inc., as assignor, Morgan Stanley
Capital Group, Inc., as assignee, and Delek US Holdings, Inc.
(incorporated by reference to Exhibit 10.24(a) to the
Companys
Form 10-K
filed on March 3, 2008)
|
|
10
|
.22++
|
|
Distribution Service Agreement dated December 28, 2007 by
and between MAPCO Express, Inc. and Core-Mark International,
Inc. (incorporated by reference to Exhibit 10.25 to the
Companys
Form 10-K
filed on March 3, 2008)
|
|
21
|
.1
|
|
Subsidiaries of the Registrant
|
|
23
|
.1
|
|
Consent of Ernst & Young LLP
|
|
24
|
.1
|
|
Power of Attorney
|
|
31
|
.1
|
|
Certification of the Companys Chief Executive Officer
pursuant to
Rule 13a-14(a)/15(d)-14(a)
under the Securities Exchange Act
|
|
31
|
.2
|
|
Certification of the Companys Chief Financial Officer
pursuant to
Rule 13a-14(a)/15(d)-14(a)
under the Securities Exchange Act
|
70
|
|
|
|
|
Exhibit No.
|
|
Description
|
|
|
32
|
.1
|
|
Certification of the Companys Chief Executive Officer
pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|
|
32
|
.2
|
|
Certification of the Companys Chief Financial Officer
pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|
|
|
|
* |
|
Management contract or compensatory plan or arrangement. |
|
+ |
|
Confidential portions of this exhibit have been omitted pursuant
to an order of the Securities and Exchange Commission granting
confidential treatment under Rule 406 of the Securities
Act. Omitted portions have been filed separately with the
Securities and Exchange Commission. |
|
++ |
|
Confidential portions of this exhibit have been omitted pursuant
to an order of the Securities and Exchange Commission granting
confidential treatment under
Rule 24b-2
of the Securities Exchange Act. Omitted portions have been filed
separately with the Securities and Exchange Commission. |
71
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of
the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Delek US Holdings, Inc.
Edward Morgan
Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
Dated: March 9, 2009
Pursuant to the requirements of the Securities Exchange Act
of 1934, this report has been signed below by or on behalf of
the following persons on behalf of the registrant and in the
capacities indicated on March 9, 2008:
Ezra Uzi Yemin
Director, President and Chief Executive Officer
(Principal Executive Officer)
Gabriel Last
Director
Asaf Bartfeld
Director
Carlos E. Jorda
Director
Zvi Greenfeld
Director
72
Philip L. Maslowe
Director
Charles H. Leonard
Director
Edward Morgan
Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
Edward Morgan
Individually and as
Attorney-in-Fact
73
Delek US
Holdings, Inc.
Consolidated Financial Statements
As of December 31, 2008 and 2007 and
For Each of the Three Years Ended December 31,
2008
INDEX TO FINANCIAL STATEMENTS
|
|
|
|
|
|
|
|
F-2
|
|
Audited Financial Statements:
|
|
|
|
|
|
|
|
F-4
|
|
|
|
|
F-5
|
|
|
|
|
F-6
|
|
|
|
|
F-7
|
|
|
|
|
F-8
|
|
All other financial schedules are not required under related
instructions, or are inapplicable and therefore have been
omitted.
F-1
Report of
Independent Registered Public Accounting Firm
The Board of Directors and Shareholders of
Delek US Holdings, Inc.
We have audited Delek US Holdings, Inc.s internal control
over financial reporting as of December 31, 2008, based on
criteria established in Internal Control Integrated
Framework issued by the Committee of Sponsoring Organizations of
the Treadway Commission (the COSO criteria). Delek
US Holdings, Inc.s management is responsible for
maintaining effective internal control over financial reporting,
and for its assessment of the effectiveness of internal control
over financial reporting included in Managements Report on
Internal Control over Financial Reporting. Our responsibility is
to express an opinion on the companys internal control
over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control
over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of
internal control over financial reporting, assessing the risk
that a material weakness exists, testing and evaluating the
design and operating effectiveness of internal control based on
the assessed risk, and performing such other procedures as we
considered necessary in the circumstances. We believe that our
audit provides a reasonable basis for our opinion.
A companys internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A companys
internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of
management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
In our opinion, Delek US Holdings, Inc. maintained, in all
material respects, effective internal control over financial
reporting as of December 31, 2008, based on the COSO
criteria.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
consolidated balance sheets of Delek US Holdings, Inc. as of
December 31, 2008 and 2007, and the related consolidated
statements of operations, changes in shareholders equity
and comprehensive income, and cash flows for each of the three
years in the period ended December 31, 2008 of Delek US
Holdings, Inc. and our report dated March 3, 2009 expressed
an unqualified opinion thereon.
/s/ Ernst & Young LLP
Nashville, Tennessee
March 3, 2009
F-2
Report of
Independent Registered Public Accounting Firm
The Board of Directors and Shareholders of
Delek US Holdings, Inc.
We have audited the accompanying consolidated balance sheets of
Delek US Holdings, Inc. as of December 31, 2008 and 2007,
and the related consolidated statements of operations, changes
in shareholders equity and comprehensive income, and cash
flows for each of the three years in the period ended
December 31, 2008. These financial statements are the
responsibility of the Companys management. Our
responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the consolidated
financial position of Delek US Holdings, Inc. at
December 31, 2008 and 2007, and the consolidated results of
its operations and its cash flows for each of the three years in
the period ended December 31, 2008, in conformity with
U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), Delek
US Holdings, Inc.s internal control over financial
reporting as of December 31, 2008, based on criteria
established in Internal Control Integrated Framework
issued by the Committee on Sponsoring Organizations of the
Treadway Commission and our report dated March 3, 2009
expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Nashville, Tennessee
March 3, 2009
F-3
Delek US
Holdings, Inc.
Consolidated
Balance Sheets
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(In millions, except share and per share data)
|
|
|
ASSETS
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
15.3
|
|
|
$
|
105.0
|
|
Short-term investments
|
|
|
|
|
|
|
44.4
|
|
Accounts receivable
|
|
|
45.4
|
|
|
|
118.8
|
|
Inventory
|
|
|
80.2
|
|
|
|
124.7
|
|
Assets held for sale
|
|
|
20.9
|
|
|
|
34.7
|
|
Other current assets
|
|
|
38.8
|
|
|
|
47.7
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
200.6
|
|
|
|
475.3
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment:
|
|
|
|
|
|
|
|
|
Property, plant and equipment
|
|
|
708.9
|
|
|
|
610.2
|
|
Less: accumulated depreciation
|
|
|
(127.2
|
)
|
|
|
(89.6
|
)
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment, net
|
|
|
581.7
|
|
|
|
520.6
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
77.5
|
|
|
|
86.1
|
|
Other intangibles, net
|
|
|
10.0
|
|
|
|
11.2
|
|
Minority investment
|
|
|
131.6
|
|
|
|
139.5
|
|
Other non-current assets
|
|
|
15.8
|
|
|
|
11.6
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
1,017.2
|
|
|
$
|
1,244.3
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS EQUITY
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
68.0
|
|
|
$
|
248.6
|
|
Current portion of long-term debt and capital lease obligations
|
|
|
68.9
|
|
|
|
10.8
|
|
Notes payable
|
|
|
15.0
|
|
|
|
|
|
Liabilities associated with assets held for sale
|
|
|
0.2
|
|
|
|
0.4
|
|
Accrued expenses and other current liabilities
|
|
|
34.1
|
|
|
|
45.2
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
186.2
|
|
|
|
305.0
|
|
|
|
|
|
|
|
|
|
|
Non-current liabilities:
|
|
|
|
|
|
|
|
|
Long-term debt and capital lease obligations, net of current
portion
|
|
|
202.1
|
|
|
|
344.4
|
|
Environmental liabilities, net of current portion
|
|
|
5.2
|
|
|
|
6.7
|
|
Asset retirement obligations
|
|
|
6.6
|
|
|
|
5.3
|
|
Deferred tax liabilities
|
|
|
71.1
|
|
|
|
60.3
|
|
Other non-current liabilities
|
|
|
12.2
|
|
|
|
10.1
|
|
|
|
|
|
|
|
|
|
|
Total non-current liabilities
|
|
|
297.2
|
|
|
|
426.8
|
|
|
|
|
|
|
|
|
|
|
Shareholders equity:
|
|
|
|
|
|
|
|
|
Preferred stock, $0.01 par value, 10,000,000 shares
authorized, no shares issued and outstanding
|
|
|
|
|
|
|
|
|
Common stock, $0.01 par value, 110,000,000 shares
authorized, 53,682,070 and 53,666,570 shares issued and
outstanding at December 31, 2008 and 2007, respectively
|
|
|
0.5
|
|
|
|
0.5
|
|
Additional paid-in capital
|
|
|
277.8
|
|
|
|
274.1
|
|
Accumulated other comprehensive income
|
|
|
(0.6
|
)
|
|
|
0.3
|
|
Retained earnings
|
|
|
256.1
|
|
|
|
237.6
|
|
|
|
|
|
|
|
|
|
|
Total shareholders equity
|
|
|
533.8
|
|
|
|
512.5
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity
|
|
$
|
1,017.2
|
|
|
$
|
1,244.3
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to the consolidated financial statements
F-4
Delek US
Holdings, Inc.
Consolidated
Statements of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(In millions, except shares and per share data)
|
|
|
Net sales
|
|
$
|
4,615.2
|
|
|
$
|
3,900.9
|
|
|
$
|
3,016.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods sold
|
|
|
4,210.0
|
|
|
|
3,453.5
|
|
|
|
2,643.7
|
|
Operating expenses
|
|
|
233.8
|
|
|
|
207.1
|
|
|
|
162.4
|
|
General and administrative expenses
|
|
|
56.8
|
|
|
|
54.0
|
|
|
|
37.4
|
|
Depreciation and amortization
|
|
|
40.9
|
|
|
|
31.6
|
|
|
|
21.4
|
|
Gain on sales of assets
|
|
|
(6.8
|
)
|
|
|
|
|
|
|
|
|
Gain on forward contract activities
|
|
|
|
|
|
|
(0.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating costs and expenses
|
|
|
4,534.7
|
|
|
|
3,746.1
|
|
|
|
2,864.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
80.5
|
|
|
|
154.8
|
|
|
|
151.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
23.7
|
|
|
|
30.6
|
|
|
|
24.2
|
|
Interest income
|
|
|
(2.1
|
)
|
|
|
(9.3
|
)
|
|
|
(7.2
|
)
|
Interest expense to related parties
|
|
|
|
|
|
|
|
|
|
|
1.0
|
|
Loss from minority investment
|
|
|
7.9
|
|
|
|
0.8
|
|
|
|
|
|
Gain on debt extinguishment
|
|
|
(1.6
|
)
|
|
|
|
|
|
|
|
|
Impairment of goodwill
|
|
|
11.2
|
|
|
|
|
|
|
|
|
|
Other expenses, net
|
|
|
1.0
|
|
|
|
2.4
|
|
|
|
0.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-operating expenses
|
|
|
40.1
|
|
|
|
24.5
|
|
|
|
18.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before income tax expense
|
|
|
40.4
|
|
|
|
130.3
|
|
|
|
132.9
|
|
Income tax expense
|
|
|
17.4
|
|
|
|
34.9
|
|
|
|
42.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
|
23.0
|
|
|
|
95.4
|
|
|
|
90.5
|
|
Income from discontinued operations, net of tax
|
|
|
3.5
|
|
|
|
1.0
|
|
|
|
2.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
26.5
|
|
|
$
|
96.4
|
|
|
$
|
93.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
$
|
0.43
|
|
|
$
|
1.83
|
|
|
$
|
1.92
|
|
Income from discontinued operations
|
|
|
0.07
|
|
|
|
0.02
|
|
|
|
0.06
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total basic earnings per share
|
|
$
|
0.50
|
|
|
$
|
1.85
|
|
|
$
|
1.98
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
$
|
0.43
|
|
|
$
|
1.80
|
|
|
$
|
1.89
|
|
Income from discontinued operations
|
|
|
0.06
|
|
|
|
0.02
|
|
|
|
0.05
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total diluted earnings per share
|
|
$
|
0.49
|
|
|
$
|
1.82
|
|
|
$
|
1.94
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
53,675,145
|
|
|
|
52,077,893
|
|
|
|
47,077,369
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
54,401,747
|
|
|
|
52,850,231
|
|
|
|
47,915,962
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends declared per common share outstanding
|
|
$
|
0.15
|
|
|
$
|
0.54
|
|
|
$
|
0.04
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to the consolidated financial statements
F-5
Delek US
Holdings, Inc.
Consolidated
Statements of Changes in Shareholders Equity and
Comprehensive Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
Other
|
|
|
|
|
|
Total
|
|
|
|
Common Stock
|
|
|
Paid-in
|
|
|
Comprehensive
|
|
|
Retained
|
|
|
Shareholders
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Income
|
|
|
Earnings
|
|
|
Equity
|
|
|
|
(In millions, except shares and per share data)
|
|
|
Balance at December 31, 2005
|
|
|
39,389,869
|
|
|
|
0.4
|
|
|
|
40.7
|
|
|
|
|
|
|
|
78.7
|
|
|
|
119.8
|
|
Comprehensive income, net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
93.0
|
|
|
|
93.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
93.0
|
|
|
|
93.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from public offering
|
|
|
11,500,000
|
|
|
|
0.1
|
|
|
|
166.8
|
|
|
|
|
|
|
|
|
|
|
|
166.9
|
|
Common stock dividends ($0.04 per share)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1.9
|
)
|
|
|
(1.9
|
)
|
Stock-based compensation expense
|
|
|
|
|
|
|
|
|
|
|
2.4
|
|
|
|
|
|
|
|
|
|
|
|
2.4
|
|
Income tax benefit of stock-based compensation expense
|
|
|
|
|
|
|
|
|
|
|
1.5
|
|
|
|
|
|
|
|
|
|
|
|
1.5
|
|
Exercise of stock-based awards
|
|
|
250,000
|
|
|
|
|
|
|
|
0.5
|
|
|
|
|
|
|
|
|
|
|
|
0.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2006
|
|
|
51,139,869
|
|
|
|
0.5
|
|
|
|
211.9
|
|
|
|
|
|
|
|
169.8
|
|
|
|
382.2
|
|
Comprehensive income, net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
96.4
|
|
|
|
96.4
|
|
Unrealized gain on cash flow hedges, net of deferred income tax
expense of $0.2 million
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.3
|
|
|
|
|
|
|
|
0.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.3
|
|
|
|
96.4
|
|
|
|
96.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock dividends ($0.54 per share)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(28.5
|
)
|
|
|
(28.5
|
)
|
Stock-based compensation expense
|
|
|
|
|
|
|
|
|
|
|
3.3
|
|
|
|
|
|
|
|
|
|
|
|
3.3
|
|
Income tax benefit of stock-based compensation expense
|
|
|
|
|
|
|
|
|
|
|
3.8
|
|
|
|
|
|
|
|
|
|
|
|
3.8
|
|
Exercise of stock-based awards
|
|
|
610,034
|
|
|
|
|
|
|
|
3.9
|
|
|
|
|
|
|
|
|
|
|
|
3.9
|
|
Stock issued in connection with purchase of minority investment
|
|
|
1,916,667
|
|
|
|
|
|
|
|
51.2
|
|
|
|
|
|
|
|
|
|
|
|
51.2
|
|
Cumulative effect of adoption of FIN 48
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(0.1
|
)
|
|
|
(0.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2007
|
|
|
53,666,570
|
|
|
$
|
0.5
|
|
|
$
|
274.1
|
|
|
$
|
0.3
|
|
|
$
|
237.6
|
|
|
$
|
512.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income, net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26.5
|
|
|
|
26.5
|
|
Unrealized loss on cash flow hedges, net of deferred income tax
benefit of $0.6 million
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(0.9
|
)
|
|
|
|
|
|
|
(0.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(0.9
|
)
|
|
|
26.5
|
|
|
|
25.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock dividends ($0.15 per share)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8.0
|
)
|
|
|
(8.0
|
)
|
Stock-based compensation expense
|
|
|
|
|
|
|
|
|
|
|
3.7
|
|
|
|
|
|
|
|
|
|
|
|
3.7
|
|
Exercise of stock-based awards
|
|
|
15,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2008
|
|
|
53,682,070
|
|
|
$
|
0.5
|
|
|
$
|
277.8
|
|
|
$
|
(0.6
|
)
|
|
$
|
256.1
|
|
|
$
|
533.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to the consolidated financial statements
F-6
Delek US
Holdings, Inc.
Consolidated
Statements of Cash Flows
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
(In millions)
|
|
|
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
26.5
|
|
|
$
|
96.4
|
|
|
$
|
93.0
|
|
Adjustments to reconcile net income to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
40.9
|
|
|
|
31.6
|
|
|
|
21.4
|
|
Amortization of deferred financing costs
|
|
|
4.7
|
|
|
|
4.9
|
|
|
|
4.2
|
|
Accretion of asset retirement obligations
|
|
|
0.7
|
|
|
|
0.1
|
|
|
|
0.3
|
|
Deferred income taxes
|
|
|
10.0
|
|
|
|
10.2
|
|
|
|
22.8
|
|
Loss from minority investment
|
|
|
7.9
|
|
|
|
0.8
|
|
|
|
|
|
Loss on interest rate derivative instruments
|
|
|
1.0
|
|
|
|
2.4
|
|
|
|
|
|
Gain on sale of assets
|
|
|
(6.8
|
)
|
|
|
|
|
|
|
|
|
Gain on sale of assets held for sale
|
|
|
(0.4
|
)
|
|
|
|
|
|
|
|
|
Loss on impairment of goodwill
|
|
|
11.2
|
|
|
|
|
|
|
|
|
|
Stock-based compensation expense
|
|
|
3.7
|
|
|
|
3.3
|
|
|
|
2.4
|
|
Income tax benefit of stock-based compensation
|
|
|
|
|
|
|
(3.8
|
)
|
|
|
(1.5
|
)
|
Changes in assets and liabilities, net of acquisitions:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable, net
|
|
|
73.4
|
|
|
|
(35.1
|
)
|
|
|
(30.7
|
)
|
Inventory and other current assets
|
|
|
59.0
|
|
|
|
(19.5
|
)
|
|
|
(37.2
|
)
|
Accounts payable and other current liabilities
|
|
|
(193.2
|
)
|
|
|
84.8
|
|
|
|
37.1
|
|
Non-current assets and liabilities, net
|
|
|
(10.3
|
)
|
|
|
3.3
|
|
|
|
(2.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
28.3
|
|
|
|
179.4
|
|
|
|
109.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of short-term investments
|
|
|
(472.8
|
)
|
|
|
(3,213.7
|
)
|
|
|
(520.2
|
)
|
Sales of short-term investments
|
|
|
517.2
|
|
|
|
3,242.5
|
|
|
|
473.6
|
|
Purchase of minority investment
|
|
|
|
|
|
|
(89.1
|
)
|
|
|
|
|
Business combinations, net of cash acquired
|
|
|
|
|
|
|
(74.6
|
)
|
|
|
(107.3
|
)
|
Purchase of property, plant and equipment
|
|
|
(102.1
|
)
|
|
|
(86.9
|
)
|
|
|
(96.6
|
)
|
Proceeds from sale of convenience store assets
|
|
|
8.8
|
|
|
|
0.3
|
|
|
|
|
|
Proceeds from sale of assets held for sale
|
|
|
9.8
|
|
|
|
|